How it works
Gross profit is what's left from sales after paying for the goods you sold. It's the money that has to cover rent, wages, utilities and everything else before you see a profit.
Gross profit = Net sales − Cost of goods sold
Gross margin = Gross profit ÷ Net sales
Net profit = Gross profit − Operating expenses
Net margin = Net profit ÷ Net sales
Example. A store sells $12,500 in a week, and the goods it sold cost $8,750.
Gross profit is $3,750, a 30.0% gross margin.
If the week's operating expenses are $3,000, net profit is $750, a 6.0% net margin.
Gross margin versus markup
The same gross profit can be described two ways. As a share of sales it's gross margin (30.0% above). As a share of cost it's markup (42.9% above). Your profit and loss statement uses gross margin, so that's the number to compare against last year or against your category.
Getting the inputs right
- Net sales is sales after returns and discounts, and before sales tax. Sales tax belongs to the state, not to you.
- Cost of goods sold is the cost of what you sold, not what you bought. If you know your inventory counts and purchases, the cost of goods sold calculator will work it out.
- Operating expenses are everything else it takes to run the store for the same period.
Common questions
- Why is my gross margin different from the margin on individual items?
- Store-wide gross margin blends every category together, weighted by how much of each you sell, and it's lowered by shrink, markdowns and spoilage. A store full of 40% items can easily end up with a lower margin overall.
- Should card fees go in cost of goods sold?
- Usually not. Most stores treat card processing fees as an operating expense. Whatever you choose, be consistent so periods compare fairly.
Last updated October 11, 2026.