Understanding if your business is profitable

Did your business run at a profit last month? Knowing if you’re currently profitable is a vital part of your financial management – but not everyone knows how to check this metric.

A recent Xero survey from October 2025 revealed that nearly two in five small business owners (38%) are unaware whether their business was profitable last month. That’s a startling (and unnecessary) failing when today’s cloud accounting makes it so easy to judge your profitability.

Let’s look at what we mean by ‘profitable’ and how to track and measure your profitability.

1. What is gross profit?

Gross profit is the money left over once you’ve deducted the direct costs associated with making or delivering your product or service.

Think of profit as your revenue (income) minus your 'cost of goods sold' (COGS). COGS includes things like raw materials, direct labour and packaging. It's a vital number to measure, as it tells you how efficiently you’re producing and delivering your core offering. A strong gross product indicates you’ve got effective pricing and production controls in place.

2. What is net profit?

Net profit is often referred to as the 'bottom line' or true profit. It’s your business's ultimate take-home earnings, once all other costs and tax is deducted.

You calculate net profit by taking your gross profit figure and subtracting all remaining operational and administrative expenses. These overheads include indirect costs like office rent, administrative salaries, utilities, marketing, taxes and depreciation. Net profit shows the overall financial success of your entire business model after every single cost, operational or non-operational, has been accounted for. This is the acid test of whether you’re turning a profit as a business.

3. How the P&L report measures your profitability

The profit and loss (P&L) report, also known as the income statement, is your financial report card for a specific time period (e.g. a month, quarter or year).

Your P&L report acts as a chronological ledger, starting with total revenue, deducting COGS to show gross profit, and then subtracting all other expenses to give you your net profit figure.

With cloud accounting platforms, like Xero, Quickbooks and Sage, it’s incredibly easy to run regular P&L reports and even to add profit metrics to your everyday dashboard.

By reviewing your P&L regularly, you can:

• Track financial trends in your accounting
• Identify where costs are running too high
• Strategically measure your business performance

Keeping your business profitable is an ongoing process. It means reviewing your pricing, checking on your spending and making sure your margins are delivering sufficient profit.