How to calculate net profit

Published Thursday 23 July 2026

Table of contents

• What is net profit?
• Net profit formula
• How to calculate net profit
• Net profit calculation examples
• What is net profit margin?
• Gross profit vs net profit
• Why net profit matters for your business
• How to improve your net profit
• Track your net profit with Xero
• FAQs on net profit

Key takeaways

• Net profit is the amount your business keeps after subtracting all expenses from total revenue, including operating costs, taxes and interest.
• You can calculate net profit using the formula: net profit = total revenue - total expenses, or by subtracting operating expenses, interest and taxes from your gross profit.
• Tracking your net profit margin as a percentage helps you compare performance over time and against industry benchmarks, regardless of business size.
• Reviewing your net profit regularly turns it from a backward-looking number into a practical tool for pricing, budgeting and growth decisions.

What is net profit?

Net profit is one of the clearest indicators of whether your business is actually making money. It's also known as net income or the "bottom line" on your profit and loss statement.

In simple terms, net profit is the amount left over after you subtract every business expense from your total revenue. That includes the cost of goods sold, operating expenses like rent and wages, interest on loans, and taxes. If the number is positive, your business earned more than it spent. If it's negative, your expenses exceeded your income.

Net profit formula

Knowing the formula gives you a straightforward way to check your business's financial health at any point. There are 2 common ways to express it.

The simplest version is:

Net profit = total revenue - total expenses

A more detailed version breaks total expenses into their components:

Net profit = gross profit - operating expenses - interest - taxes

Both formulas give you the same result. The expanded version is useful when you want to see exactly where your money goes, while the simple version works well for a quick snapshot.

How to calculate net profit

Working through the calculation step by step helps you understand each layer of cost in your business. Here's how to do it using figures from your profit and loss statement.

1. Add up your total revenue

Start with all the income your business earned during the period. This includes sales revenue, service fees, and any other income such as interest earned or asset sales. Use the total figure before any deductions.

2. Calculate your cost of goods sold

Identify the direct costs tied to producing or delivering what you sell. For a retailer, that's the wholesale cost of stock. For a service business, it might include contractor fees or materials. Subtract this from your total revenue to find your gross profit.

3. Subtract your operating expenses

Deduct the day-to-day costs of running your business from gross profit. Operating expenses typically include rent, utilities, wages, marketing, insurance and office supplies. These are the costs you'd still pay even if you didn't make a single sale that month.

4. Deduct interest and taxes

Remove any interest payments on business loans or credit facilities. Then subtract your tax obligations for the period, including income tax and any other applicable taxes. The figure you're left with is your net profit.

Net profit calculation examples

Seeing the formula applied to realistic numbers makes the calculation easier to follow. Here are 2 examples based on common Australian small business scenarios.

Example 1: retail shop

Say you run a homewares store and want to calculate your net profit for the quarter. Your figures look like this:

• Total revenue: $120,000
• Cost of goods sold: $48,000
• Operating expenses (rent, wages, utilities, marketing): $42,000
• Interest on a business loan: $1,500
• Tax: $7,125

Gross profit = $120,000 - $48,000 = $72,000. Then subtract operating expenses, interest and tax: $72,000 - $42,000 - $1,500 - $7,125 = $21,375 net profit.

Example 2: freelance consultant

Now imagine you're a solo marketing consultant. Your quarterly numbers are:

• Total revenue: $45,000
• Cost of goods sold (subcontractor fees): $5,000
• Operating expenses (home office, software, insurance, phone): $8,500
• Interest: $0
• Tax: $7,875

Gross profit = $45,000 - $5,000 = $40,000. Then: $40,000 - $8,500 - $0 - $7,875 = $23,625 net profit.

What is net profit margin?

While net profit tells you a dollar amount, net profit margin tells you what percentage of each dollar in revenue you actually keep. It's a more useful metric for comparing performance across different time periods or against other businesses in your industry.

Net profit margin formula

The calculation is straightforward:

Net profit margin = (net profit / total revenue) x 100

Using the retail shop example above: ($21,375 / $120,000) x 100 = 17.8% net profit margin. You can use a net profit margin calculator to check your own figures quickly.

What is a good net profit margin?

A "good" margin depends on your industry, business model and stage of growth. As a general guide for Australian small businesses:

• 5% or below is considered low and may signal tight margins or high costs
• 5% to 10% is healthy for many industries, especially retail and hospitality
• 10% to 20% is strong and typical for professional services and consulting
• Above 20% is excellent and more common in technology or specialist niches

Your margin is most useful when you track it over time and compare it against businesses similar to yours, rather than chasing a single benchmark.

Gross profit vs net profit

These 2 figures are related but tell you different things about your business. Understanding the distinction helps you spot where money is being lost.

Gross profit is your revenue minus the direct cost of goods sold. It shows whether your core product or service is profitable before you account for overheads. If your gross profit margin is shrinking, it usually means your production costs are rising or your pricing isn't keeping pace.

Net profit goes further by subtracting all remaining expenses: operating costs, interest and taxes. It's the final measure of what your business actually earned. You might have a healthy gross profit but a thin net profit if your overheads, loan repayments or tax bill are high.

Both numbers matter. Gross profit helps you evaluate your pricing and cost of goods. Net profit tells you whether the whole operation is sustainable.

Why net profit matters for your business

Net profit isn't just an accounting figure to file away at tax time. It's a practical decision-making tool that affects how you run your business day to day.

Here are some of the ways it helps you make better decisions:

• It confirms whether your business is genuinely profitable after every cost is accounted for
• It highlights periods where expenses spike or revenue dips, so you can act early
• It helps you set realistic budgets and forecast cash flow for the months ahead
• It gives lenders and investors a clear picture of your financial performance if you're seeking funding
• It supports smarter pricing decisions by showing whether your margins can absorb cost increases

Reviewing your profit and loss statement regularly, rather than just at the end of the financial year, makes net profit a forward-looking metric you can act on.

How to improve your net profit

Once you know your net profit, the next step is finding ways to grow it. There are really only 3 levers: increase revenue, reduce costs, or both.

Here are practical approaches that work for many small businesses:

• Review your pricing to make sure it reflects current costs, market rates and the value you deliver
• Cut unnecessary subscriptions, services or supplier costs that don't directly support revenue
• Negotiate better terms with suppliers, especially for high-volume or recurring purchases
• Focus on your most profitable products or services and consider scaling back lower-margin offerings
• Automate repetitive admin tasks like invoicing, bank reconciliation and expense tracking to save time and reduce errors
• Use a profit and loss template to track your margins monthly, not just at year-end

Small, consistent improvements across several areas tend to have a bigger impact on net profit than a single large change. The key is to measure profitability regularly so you can see what's working.

Track your net profit with Xero

Calculating net profit manually works, but it's easier when your accounting software does the heavy lifting. Xero pulls in your bank transactions automatically, categorises expenses, and generates profit and loss reports so you can see your net profit at any time.

With real-time reporting, you don't have to wait until the end of the quarter to find out how your business is tracking. You can spot trends, compare periods and make confident decisions based on up-to-date numbers. Get one month free.

FAQs on net profit

Here are answers to some frequently asked questions about net profit.

What's the difference between net profit and cash flow?

Net profit measures your earnings after all expenses over a period, while cash flow tracks the actual movement of money in and out of your bank account. You can be profitable on paper but still have cash flow problems if customers are slow to pay.

Can net profit be negative?

Yes. A negative net profit means your total expenses exceeded your total revenue for that period, which is called a net loss. It doesn't necessarily mean your business is failing, but it does signal you need to review your costs or revenue strategy.

How often should you calculate net profit?

Monthly is ideal for most small businesses, as it gives you enough data to spot trends and respond quickly. At a minimum, review it quarterly so you aren't caught off guard at tax time.

Does net profit include GST?

No. GST collected from customers isn't your income; it's held on behalf of the ATO. Your revenue figures should exclude GST when calculating net profit, and GST paid on business purchases is claimed back as an input tax credit.

Is net profit the same as taxable income?

Not exactly. Taxable income is calculated using ATO rules, which may treat certain deductions and timing differently from your accounting profit. Your net profit gives a commercial view of performance, while taxable income determines what you owe in tax.