Net profit
Learn what net profit is, how to calculate it with the formula, and why it matters for your business.
Published Thursday 23 July 2026
Table of contents
Net profit is what the business gets to keep, which makes it one of the most important numbers people look at
Key takeaways
- Net profit is the money you keep after subtracting all expenses, interest and taxes from your total revenue.
- The basic formula is net profit = total revenue − total expenses.
- Net profit margin shows the share of revenue you keep as profit: net profit ÷ revenue × 100.
- Tracking net profit helps you gauge financial health, secure funding and make confident decisions.
What is net profit?
Every business owner wants to know what's left once the bills are paid. That figure is your net profit.
Net profit is the money you get to keep after all your expenses, interest and taxes are paid. It's often called the bottom line, and you may also see it referred to as net income or net earnings.
Once you know your net profit, you can decide whether to distribute it to the owners or reinvest it back into the business.
The net profit formula
You can work out net profit in two ways, and both give you the same result. One is a quick summary; the other shows where the money goes.
The simplest version is: net profit = total revenue − total expenses.
The layered version breaks down the costs: net profit = gross profit − operating expenses − interest − taxes.
How to calculate net profit
To calculate net profit, start with your total revenue and subtract each cost in turn. Follow these steps.
- Add up your total revenue for the period.
- Subtract your cost of goods sold to find gross profit.
- Subtract operating expenses such as rent, wages and utilities.
- Subtract interest on any loans or debt.
- Subtract taxes to arrive at your net profit.
Net profit example
A worked example makes the formula easier to follow. Imagine you run a small retail business in Canada.
Over the year, your total revenue is $500,000 and your cost of goods sold is $200,000, which leaves a gross profit of $300,000.
Your operating expenses come to $150,000, interest on a business loan is $10,000, and taxes are $30,000.
Subtract those from your gross profit and your net profit is $110,000, calculated as 300,000 − 150,000 − 10,000 − 30,000.
Gross profit vs operating profit vs net profit
These three measures of profit answer different questions, so it helps to keep them separate. Each one strips out more costs than the last.
Gross profit is your revenue minus the cost of goods sold. It shows how much you make from selling your products or services before other costs come in.
Operating profit takes gross profit and subtracts operating expenses like rent and wages, but not interest or taxes. It shows how well your core operations perform.
Net profit goes one step further and subtracts interest and taxes as well. It's the true bottom line, or what you actually keep.
What is net profit margin?
Net profit margin turns your net profit into a percentage, which makes it easier to compare periods or businesses of different sizes. It's one of the most useful profitability ratios you can track.
Net profit margin is the share of your revenue that you keep as profit. You calculate it as net profit ÷ revenue × 100.
Using the example above, a net profit of $110,000 on revenue of $500,000 gives a net profit margin of 22%.
Why net profit matters
Net profit is one of the clearest signals of how your business is doing. Several groups pay close attention to it:
- owners and shareholders, who look at profit to decide on dividends or reinvestment
- lenders, who check whether you earn enough to repay debt
- investors, who use it to judge whether your business is worth backing
A steady or growing net profit is a strong sign of financial health, while a shrinking one is an early warning to review your costs.
How to improve net profit
You can improve net profit by earning more or spending less, and often a mix of both works best. A few practical moves can help:
- Raise your prices or shift your product mix toward higher-margin items
- Reduce overhead costs such as rent, subscriptions and utilities
- Manage inventory closely to cut waste and free up cash
- Lower direct costs by negotiating with suppliers or sourcing more efficiently
Track your net profit with Xero
Keeping an eye on net profit is easier when your numbers update in real time. Xero brings your income and expenses together in one place, so you can see your profit at a glance and run reports whenever you need them.
You can track profit, monitor cash flow and make confident decisions from a single dashboard. Try Xero and get one month free.
FAQs on net profit
Here are answers to some frequently asked questions about net profit.
What is the difference between net profit and gross profit?
Gross profit is revenue minus the cost of goods sold, while net profit subtracts all remaining costs, including operating expenses, interest and taxes. Gross profit shows product profitability, and net profit shows what you actually keep.
Is net profit the same as net income?
Yes, net profit and net income mean the same thing. You may also see it called net earnings or the bottom line.
How do you calculate net profit margin?
Divide your net profit by your total revenue and multiply by 100. The result is the percentage of revenue you keep as profit.
Can net profit be negative?
Yes, if your total expenses are greater than your revenue you make a net loss. A negative net profit is a sign to review your pricing and costs.
Is net profit the same as taxable income?
No, net profit is your accounting profit after expenses, while taxable income is worked out using tax rules that may allow different deductions. Speak with an accountant to confirm your taxable income.
Related terms
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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.