Gross Profit Calculator
Calculate gross profit, gross profit margin %, COGS, or revenue instantly. Includes an optional net profit section and industry benchmark comparisons for UK businesses.
Enter your total revenue and cost of goods sold (COGS) to calculate gross profit and gross margin.
What is Gross Profit?
Gross profit is the profit a business earns from its core trading activity after deducting the direct costs of producing or purchasing the goods or services sold. It is calculated by subtracting the Cost of Goods Sold (COGS) from total revenue (turnover).
Gross Profit Formula
Gross Margin % = Gross Profit ÷ Revenue × 100
For example, if a UK retailer generates £500,000 in annual sales and the goods they sold cost £320,000 to purchase, their gross profit is £180,000 and their gross margin is 36%. This £180,000 must then cover all operating expenses (rent, wages, marketing, utilities) before the business makes a net profit.
Gross Profit Margin vs Net Profit Margin
These are two fundamentally different measures of profitability and should never be confused:
| Metric | What it measures | Formula |
|---|---|---|
| Gross Profit | Revenue minus COGS only | Revenue − COGS |
| Gross Margin % | Gross profit as % of revenue | Gross Profit ÷ Revenue × 100 |
| Net Profit | Revenue minus ALL costs | Gross Profit − Operating Expenses |
| Net Margin % | Net profit as % of revenue | Net Profit ÷ Revenue × 100 |
A business can have a healthy 40% gross margin but a slim 3% net margin if operating expenses consume most of the gross profit. Both metrics matter: gross margin reveals pricing power and production efficiency, while net margin reveals overall business efficiency.
COGS Explained: What Is and Is Not Included
Understanding what counts as COGS is critical for correct gross profit calculation and for HMRC compliance.
COGS includes:
- Raw materials and components used in production
- Direct labour (wages of production workers — not admin or sales staff)
- Manufacturing overhead directly tied to production (factory rent, machinery depreciation)
- Goods purchased for resale (for retailers and wholesalers)
- Freight inbound and import duties on goods purchased for resale
COGS does NOT include:
- Office rent and utilities (operating expense)
- Sales staff and admin salaries (operating expense)
- Marketing and advertising (operating expense)
- Interest on loans (finance cost)
- Depreciation of non-production assets (operating expense)
- Legal and professional fees (operating expense)
Operating Expenses: The Bridge Between Gross and Net Profit
Operating expenses (also called overheads or OPEX) are the costs of running the business that are not directly tied to production. They include:
- Employee costs: Salaries, employer National Insurance (13.8% above the secondary threshold), auto-enrolment pension contributions
- Premises: Office and retail unit rent, business rates, building insurance
- Marketing: Digital advertising, print, trade shows, PR
- Technology: Software subscriptions, IT support, website hosting
- Finance costs: Interest on business loans and overdrafts
- Depreciation: Annual write-down of fixed assets (vehicles, equipment)
- Professional fees: Accountants, solicitors, consultants
UK Industry Gross Profit Margins by Sector
Gross margins vary enormously across industries. Here are typical ranges for UK sectors, drawn from ONS Business Survey data and published company accounts:
| Sector | Typical Gross Margin | Notes |
|---|---|---|
| Retail (non-food) | 30–50% | Fashion and homeware at upper end |
| Grocery / Food Retail | 20–30% | Supermarkets around 25% |
| Manufacturing | 25–35% | Varies widely by product type |
| Software / SaaS | 60–80% | Low COGS = high gross margin |
| Professional Services | 50–70% | Consultancy, accountancy, law |
| Food Service / Hospitality | 60–70% | On food cost; net margin is typically 3–9% |
| Construction | 15–25% | Tight margins on materials and labour |
| E-commerce | 30–50% | Before platform fees; net margins are thinner |
How to Improve Gross Profit Margin
Improving gross margin is one of the most impactful actions a business can take, since every additional pound of gross margin flows almost entirely to net profit (assuming fixed operating costs). Six proven strategies for UK businesses:
- Raise prices: A 5% price increase, if volume holds, can increase gross margin by 5 percentage points. Research suggests customers are often less price-sensitive than business owners fear.
- Reduce COGS through supplier negotiation: Consolidate purchasing, commit to higher volumes, or seek alternative suppliers. Even a 3% reduction in COGS has a significant margin impact.
- Improve production efficiency: Lean manufacturing, waste reduction, and better scheduling lower direct labour and overhead per unit.
- Shift product mix: Focus sales effort on higher-margin products or services, and consider discontinuing chronically low-margin lines.
- Reduce returns and defects: UK consumer law requires refunds; high return rates directly inflate effective COGS.
- Introduce tiered pricing: Premium tiers, add-ons, and bundles allow you to capture more value from customers willing to pay.
Gross Profit and UK Corporation Tax
HMRC does not tax gross profit; Corporation Tax is applied to taxable profits, which is broadly net profit after allowable deductions. However, the accuracy of your COGS is scrutinised during HMRC enquiries. Stock valuation, direct labour allocation, and overhead apportionment must be defensible and consistent year on year. Key points:
- COGS must only include costs directly attributable to goods or services sold
- Opening and closing stock affect COGS: COGS = Opening Stock + Purchases − Closing Stock
- R&D expenditure may qualify for R&D Tax Credits rather than being included in COGS
- The Annual Investment Allowance (AIA) allows 100% deduction of qualifying capital expenditure up to £1 million
Using Gross Profit to Value a Business
Gross profit is used in business valuation through the EV/Gross Profit multiple. This compares a company’s enterprise value (market cap plus net debt) to its annual gross profit. Higher-margin businesses like SaaS companies typically trade at higher EV/GP multiples (5–15x) than lower-margin businesses like retailers (1–3x), because gross profit in high-margin businesses is closer to operating profit. When buying or selling a business, understanding its gross profit trend over three or more years is essential.
Difference Between Gross Profit and Markup
Gross profit margin uses revenue as the denominator; markup uses cost as the denominator. If your gross margin is 40%, your equivalent markup is: 40 ÷ (100 − 40) × 100 = 66.7%. Gross profit is the standard measure for financial reporting; markup is commonly used in day-to-day pricing decisions. See our Markup Calculator for the full explanation and conversion table.
Worked Examples
Example 1: UK Software Company (SaaS)
Annual recurring revenue (ARR): £2,000,000. COGS (hosting, support staff): £400,000.
- Gross Profit = £2,000,000 − £400,000 = £1,600,000
- Gross Margin = £1,600,000 ÷ £2,000,000 × 100 = 80%
- Operating expenses (salaries, marketing, offices): £1,200,000
- Net Profit = £1,600,000 − £1,200,000 = £400,000 (20% net margin)
Example 2: UK Retailer (Clothing)
Annual revenue: £750,000. Stock purchased for resale (COGS): £375,000.
- Gross Profit = £750,000 − £375,000 = £375,000
- Gross Margin = 50%
- Operating expenses (rent £60k, salaries £180k, marketing £30k, other £40k): £310,000
- Net Profit = £375,000 − £310,000 = £65,000 (8.7% net margin)
Example 3: Manufacturing Business
Revenue: £3,200,000. Raw materials £960,000, direct labour £640,000, factory overhead £320,000. Total COGS = £1,920,000.
- Gross Profit = £3,200,000 − £1,920,000 = £1,280,000
- Gross Margin = 40%
- Operating expenses: £900,000 | Net Profit: £380,000 (11.9%)
Gross Profit in Excel: How to Calculate
| Formula | Excel Syntax | Notes |
|---|---|---|
| Gross Profit | =A2-B2 | A2=Revenue, B2=COGS |
| Gross Margin % | =(A2-B2)/A2 | Format cell as % in Excel |
| COGS from Revenue+Margin | =A2*(1-C2/100) | C2=Margin % |
| Revenue from COGS+Margin | =B2/(1-C2/100) | C2=Margin % |
| Net Profit | =(A2-B2)-D2 | D2=Operating Expenses |
Frequently Asked Questions
What is gross profit?
Gross profit is your total revenue (turnover) minus the cost of goods sold (COGS). It represents the money your business earns from selling its products or services before deducting operating expenses like rent, salaries, and marketing. For example, if you generate £500,000 in revenue and your COGS is £300,000, your gross profit is £200,000. Gross profit margin expresses this as a percentage of revenue: 40% in this case.
What is a good gross profit margin for a UK business?
A good gross margin depends on your industry. Software and tech companies typically achieve 60–80%; professional services 50–70%; retail 25–50%; manufacturing 25–35%; construction 15–25%. Rather than comparing to a universal benchmark, compare your margin to direct competitors or industry averages from ONS data. The key question is whether your gross margin is large enough to cover operating expenses and still generate a positive net profit and return on investment.
What is the difference between gross and net profit?
Gross profit = Revenue minus COGS only — the direct costs of producing your goods or services. Net profit = Gross profit minus all operating expenses (rent, salaries, marketing, utilities, depreciation, interest). Net profit is what remains after every cost has been deducted and is the figure on which Corporation Tax is calculated. A business with strong gross profit but high overheads may still make a net loss.
What costs are included in COGS?
COGS includes only the direct costs of producing or purchasing the goods sold: raw materials, direct production labour, manufacturing overhead (factory rent, machinery), and purchased goods for resale. It does not include office rent, admin salaries, marketing spend, sales commissions, loan interest, or depreciation of non-production assets. Correctly classifying costs between COGS and operating expenses is important for accurate gross profit reporting and HMRC compliance.
How do I improve my gross profit margin?
The most effective ways to improve gross margin are: (1) Increase selling prices — even 3–5% can significantly boost margins if volume holds. (2) Reduce COGS by renegotiating with suppliers or improving production efficiency. (3) Focus on higher-margin products in your mix. (4) Reduce waste and returns. (5) Improve inventory management to avoid obsolete stock write-downs. A 1% improvement in gross margin on £1,000,000 revenue equals £10,000 additional gross profit.
How do I calculate gross profit in Excel?
In Excel, gross profit is simply =Revenue−COGS. If your revenue is in cell A2 and COGS in B2, type =A2-B2 for gross profit. For gross margin percentage, use =(A2-B2)/A2 and format the cell as a percentage. For a multi-row P&L, use =SUM() to total revenue and COGS columns first. You can also use conditional formatting to highlight months where gross margin drops below your target level.