What is net profit?

Published Thursday 23 July 2026

Table of contents

• What is net profit?
• Net profit formula
• How to calculate net profit
• Net profit example
• Net profit vs gross profit
• What is net profit margin?
• 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 of money your business keeps after subtracting all expenses from total revenue, including cost of goods sold, operating costs, interest and taxes. It's often called the bottom line because it appears at the bottom of your profit and loss statement.
• You can calculate net profit using a simple formula: total revenue minus total expenses. Tracking it regularly helps you understand whether your business is genuinely profitable.
• Net profit differs from gross profit because it accounts for every expense your business incurs, not just the direct cost of producing goods or services.
• Improving your net profit doesn't always mean earning more revenue. Reducing unnecessary costs, adjusting pricing and automating manual tasks can all make a measurable difference.

What is net profit?

Net profit is one of the most important numbers on your profit and loss statement. It tells you how much money your business actually keeps after paying every expense.

Also known as net income, net earnings or simply the bottom line, net profit is what remains from your total revenue once you've subtracted the cost of goods sold (COGS), operating expenses, interest payments and taxes. It's the clearest measure of whether your business is truly profitable.

If your net profit is positive, your business is earning more than it spends. If it's negative, you're operating at a loss and may need to rethink your pricing, costs or both.

Net profit formula

The net profit formula gives you a straightforward way to measure your business's profitability.

At its simplest, the formula is:

Net profit = total revenue – total expenses

You can also break it down further to see exactly where your money goes:

Net profit = total revenue – COGS – operating expenses – interest – taxes

In this expanded version, each component represents a different category of business costs. COGS covers the direct costs of producing your products or delivering your services. Operating expenses include rent, utilities, wages, marketing and insurance. Interest covers any loan or credit repayments, and taxes include income tax and other obligations to the Australian Taxation Office (ATO).

How to calculate net profit

Calculating your net profit is straightforward once you know where to find the right numbers. Here's how to do it step by step.

1. Add up your total revenue. This is all the income your business has earned over a given period, including sales, service fees and any other income streams. Learn more about what counts as revenue.
2. Calculate your cost of goods sold (COGS). Include the direct costs of producing your goods or delivering your services, such as materials, stock purchases and direct labour.
3. Add up your operating expenses. These are the day-to-day costs of running your business: rent, utilities, wages, insurance, marketing and office supplies.
4. Include interest and tax payments. Add any interest you've paid on business loans or credit, plus your tax obligations for the period.
5. Subtract all expenses from your total revenue. The result is your net profit. If the number is positive, your business made a profit. If it's negative, you've made a loss.

If you're using Xero accounting software, your profit and loss report calculates this automatically. You can view your net profit for any period without doing the maths yourself.

Net profit example

A worked example makes the formula easier to follow. Let's say you run a small cafe in Melbourne.

Over the past quarter, your cafe earned $120,000 in total revenue from food and drink sales. Your costs for the same period looked like this:

• Cost of goods sold (ingredients, coffee beans, packaging): $40,000
• Operating expenses (rent, wages, utilities, insurance, marketing): $55,000
• Interest on a business loan: $2,000
• Tax: $5,000

Using the formula:

Net profit = $120,000 – $40,000 – $55,000 – $2,000 – $5,000 = $18,000

Your cafe's net profit for the quarter is $18,000. That's the amount you actually kept after covering every business expense. You could use this figure to plan your next quarter, set aside savings or invest back into the business.

Net profit vs gross profit

It's easy to confuse net profit with gross profit, but they measure different things.

Gross profit only accounts for the direct cost of producing your goods or services. You calculate it by subtracting COGS from your total revenue. It shows whether your core products or services are profitable before you factor in everything else.

Net profit goes further. It subtracts all expenses, including operating costs, interest and taxes. This gives you a complete picture of your business's profitability. You can see both figures side by side in a profit and loss statement example.

Using the cafe example above, gross profit would be $120,000 – $40,000 = $80,000. That looks healthy. But after subtracting operating expenses, interest and taxes, the net profit drops to $18,000. Both figures are useful, but net profit tells you what you're actually taking home.

What is net profit margin?

Net profit margin turns your net profit into a percentage, making it easier to compare performance across different periods or against industry benchmarks.

The formula is:

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

You can also use the Xero net profit margin calculator to work this out instantly.

Using the cafe example, the net profit margin would be ($18,000 / $120,000) x 100 = 15%. This means that for every dollar your cafe earns, you keep 15 cents as profit after all expenses.

Net profit margin is particularly useful because it lets you track profitability over time regardless of whether your revenue goes up or down. It's also how lenders, investors and the ATO assess financial health. A rising margin suggests your business is becoming more efficient, while a falling margin may signal growing costs or pricing issues.

Why net profit matters for your business

Understanding your net profit helps you make better decisions about how to run and grow your business.

Net profit shows whether your business model is sustainable. Revenue alone doesn't tell you much; a business can turn over millions and still operate at a loss if expenses aren't managed. Net profit cuts through the noise and shows the real result.

It also plays a practical role when you need external support. Banks and lenders look at net profit when assessing loan applications. Investors use it to evaluate whether your business is worth backing. And if you're planning to sell your business, net profit directly affects its valuation.

For day-to-day management, tracking net profit helps you spot trends early. Learning to measure profitability is a practical first step. If your net profit is shrinking quarter to quarter, you can investigate the cause before it becomes a serious problem. A profit and loss template can help you get started with regular tracking. It also helps you set realistic budgets, plan for tax obligations and decide whether you can afford to hire, expand or invest.

How to improve your net profit

Improving your net profit comes down to earning more, spending less or a combination of both. Here are practical strategies that work for Australian small businesses.

• Review your pricing. Small increases in pricing can have a big impact on your bottom line, especially if your costs have risen since you last set your prices. Research what competitors charge and consider whether your prices reflect the value you deliver.
• Cut unnecessary expenses. Go through your operating costs line by line. Cancel unused subscriptions, renegotiate supplier contracts and shop around for better deals on insurance, utilities and services.
• Improve your gross margin. Negotiate better prices with suppliers, reduce waste or find more cost-effective materials. Even small savings on COGS add up over time.
• Automate repetitive tasks. Manual bookkeeping, invoicing and bank reconciliation take time and cost money. Using Xero accounting software to automate these tasks frees up your time and reduces the risk of costly errors.
• Get paid faster. Late payments hurt your cash flow and can lead to unnecessary borrowing costs. Xero customers who use online invoice payments get paid up to twice as fast, which helps you keep cash in the business.
• Monitor your numbers regularly. Don't wait until the end of the financial year to check your profitability. Reviewing your profit and loss statement monthly gives you time to make adjustments before small issues become big problems.

Track your net profit with Xero

Knowing your net profit is only useful if you can track it easily and act on what it tells you. Xero's cloud accounting software gives you real-time visibility into your revenue, expenses and profitability, so you always know where your business stands.

With automated bank feeds, one-step reconciliation and customisable profit and loss reports, you can see your net profit at a glance without spending hours on manual calculations. Start tracking your profitability today and get one month free.

FAQs on net profit

Here are some frequently asked questions about net profit.

What is a good net profit margin?

A good net profit margin depends on your industry. In Australia, the ATO publishes industry benchmarks that can help you compare; many small businesses aim for a net profit margin between 5% and 20%.

What is the difference between net profit and net income?

Net profit and net income mean the same thing. Both refer to the amount left after subtracting all expenses from total revenue, and the terms are used interchangeably in accounting.

How often should you calculate net profit?

Calculate your net profit at least monthly so you can spot trends and make timely adjustments. If you use accounting software with real-time reporting, you can check it whenever you need to.

Does net profit include tax?

Yes, net profit is calculated after tax has been deducted. The figure that sits before tax is sometimes called "profit before tax" or "earnings before tax," while net profit reflects the final amount after all obligations are paid.