How to calculate net profit
Learn how to calculate net profit, the formula, a worked example, and how it differs from gross profit.
Published Thursday 23 July 2026
Table of contents
How to calculate net profit. When calculating net profit, your accountant also makes adjustments for depreciation
Key takeaways
- Net profit is what your business keeps after you subtract every expense from your total revenue, including operating costs, interest, and taxes.
- The quick formula is net profit = total revenue minus total expenses. You can also work it out as gross profit minus operating expenses, interest, and taxes.
- Net profit is different from gross profit, which is only revenue minus the cost of goods sold. Net profit and net income mean the same thing.
- Your net profit margin shows how much of each sales dollar you keep as profit, so it helps you compare periods and spot where money leaks.
What is net profit?
Net profit is the money your business keeps after you subtract all your expenses from your total revenue. It's also called net income and the bottom line, because it's the final figure at the foot of your income statement.
That last number tells you whether you're actually making money once every cost is accounted for. You can pay it out to owners or reinvest it back into the business.
The net profit formula
The net profit formula is simple, and you can write it two ways depending on the figures you have. Both give you the same result.
The quick version is: net profit = total revenue minus total expenses. The step-by-step version is: net profit = gross profit minus (operating expenses plus interest plus taxes). Use whichever matches the way your income statement is laid out.
How to calculate net profit
Calculating net profit is a short sequence of steps you can run straight from your income statement. Work through them in order to reach the figure at the bottom.
- Add up your total revenue for the period.
- Subtract the cost of goods sold to get your gross profit.
- Subtract your operating expenses, such as rent, wages, and utilities.
- Subtract any interest on loans and the taxes you owe.
- Record the result: this is your net profit.
When calculating net profit, your accountant also makes adjustments such as depreciation, so the figure reflects the true wear on your assets.
Example of a net profit calculation
A worked example makes the formula easier to picture. Say your business sells $20,000 worth of products, and it cost you $8,000 to make them, with operating expenses of $3,000 and taxes of $4,000.
- $20,000 minus $8,000 equals $12,000 gross profit.
- $12,000 minus the sum of $3,000 plus $4,000 equals $5,000 net profit.
So you get to keep $5,000. That number comes last on the income statement, which is why it's called the bottom line, and you can pay it out to owners or reinvest it in the business.
Net profit vs gross profit and net income
These three terms get mixed up often, but they mean different things. Getting them right helps you read your numbers with confidence.
- Gross profit is your revenue minus the cost of goods sold, so it shows the margin on what you sell before other costs.
- Net profit is your gross profit minus all other operating expenses, interest, and taxes, so it shows what's left overall.
- Net income is simply another name for net profit: the two are the same figure.
What is net profit margin?
Net profit margin turns your net profit into a percentage, so you can compare profitability no matter your size. You work it out as net profit divided by revenue, multiplied by 100.
The margin matters because it shows how much of each sales dollar you actually keep. Tracking it over time tells you whether rising costs are quietly eating into your profit.
Why net profit matters for your business
Net profit is the clearest signal of whether your business is working. It shapes the decisions you make every day and the way others judge your finances.
- Comparing net profit across periods shows whether your business is growing or slipping
- Lenders and investors look at net profit to decide whether to back you
- A healthy net profit gives you room to reinvest, pay yourself, or build a buffer
Track your profit with confidence using Xero
Working out net profit is far easier when your numbers live in one place and update as you go. Xero brings your revenue and expenses together and runs the reports for you, so you can see your bottom line without the manual math and get one month free when you start.
FAQs on net profit
Here are answers to some frequently asked questions about net profit to clear up the most common points of confusion.
What is the difference between net profit and gross profit?
Gross profit only deducts the cost of goods sold from revenue, while net profit deducts every other expense too. That means gross profit is always the larger of the two.
Is net profit the same as net income?
Yes, net profit and net income are two names for the same figure. Accountants and lenders use the terms interchangeably.
How do you calculate net profit margin?
Divide your net profit by your total revenue, then multiply by 100 to get a percentage. A $5,000 net profit on $20,000 revenue gives you a 25% margin.
What is a good net profit margin?
A good margin depends heavily on your industry, since retail and services sit at very different levels. Comparing your margin to businesses like yours tells you more than any single benchmark.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.