How to calculate net profit
Learn how to calculate net profit with the formula, a worked example and your net profit margin.
Published Thursday 6 August 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 the money left after subtracting all expenses, including cost of goods sold, operating expenses, interest and taxes, from total revenue.
- The net profit formula is total revenue minus total expenses, or gross profit minus operating expenses, interest and taxes.
- Net profit margin shows what percentage of revenue becomes profit, helping you compare performance across periods or against other businesses.
- Improving net profit typically involves reviewing pricing, reducing costs and increasing sales volume.
What is net profit?
Net profit is the amount of money your business keeps after subtracting all expenses from total revenue. These expenses include cost of goods sold, operating expenses, interest and taxes.
You may also hear net profit called net income, net earnings or the bottom line. Each term refers to the same figure: the final profit remaining once every cost has been accounted for.
Net profit formula
There are two common ways to express the net profit formula. Both arrive at the same result.
- Net profit = total revenue minus total expenses
- Net profit = gross profit minus operating expenses, interest and taxes
Total expenses include cost of goods sold, operating expenses such as rent and wages, interest on loans and tax obligations.
How to calculate net profit
Follow these steps to calculate your net profit.
- Find your total revenue for the period. This is all income from sales of products or services.
- Add up all your expenses. Include cost of goods sold, operating expenses, interest, depreciation and taxes.
- Subtract total expenses from total revenue. The result is your net profit.
Example of a net profit calculation
Here's a worked example showing how the calculation comes together. Imagine a business sells HK$20,000 worth of products in a month.
Revenue: HK$20,000Cost of goods sold: HK$8,000Gross profit: HK$12,000Operating expenses: HK$3,000Taxes: HK$4,000Net profit: HK$5,000
In this case, net profit is HK$5,000. This figure appears at the bottom line of the profit and loss statement. Business owners can use net profit to pay themselves, reinvest in growth or build reserves.
Gross profit vs net profit
Gross profit and net profit measure profitability at different stages. Understanding both helps you spot where money is being made or lost.
- Gross profit is revenue minus cost of goods sold. It shows how much you earn after covering direct production costs.
- Net profit is gross profit minus operating expenses, interest and taxes. It reflects the true profit after all costs.
A business with strong gross profit but weak net profit may have high overheads or debt costs. Tracking your gross profit margin alongside net profit helps identify where to focus improvements.
Net profit margin
Net profit margin expresses net profit as a percentage of revenue. It shows how much of each dollar earned becomes actual profit.
The formula is:
Net profit margin = (net profit ÷ revenue) × 100
Using the earlier example:
HK$5,000 ÷ HK$20,000 × 100 = 25%
A 25% net profit margin means 25 cents of every dollar in revenue becomes profit after all expenses. This metric is useful when you measure profitability over time or compare your business to industry benchmarks.
What is a good net profit margin?
There's no single answer because margins vary significantly by industry and business model. However, some general benchmarks can guide expectations.
- Around 5% is often considered low
- Around 10% is considered average
- 20% or higher is considered strong
Service businesses often achieve higher margins than retailers or manufacturers due to lower direct costs. When evaluating your margin, compare it to others in your sector. You can learn more about interpreting these figures in our guide to profit margin.
Why net profit matters
Net profit tells you whether your business is genuinely making money after covering every expense. It's one of the first figures owners, lenders and investors look at when assessing financial health.
A positive net profit means your business can fund growth, build savings or reward owners. A declining net profit signals that costs may be rising faster than revenue, prompting a closer look at spending or pricing.
How to improve your net profit
Boosting net profit comes down to increasing revenue, cutting costs or both. Here are practical tactics to consider.
- Review your pricing to ensure products and services reflect their true value
- Reduce cost of goods sold by negotiating with suppliers or finding efficiencies
- Cut operating expenses such as rent, utilities or subscriptions you no longer need
- Increase sales volume through marketing or expanding your customer base
Focusing on operating profit can also help you isolate how efficiently your core business runs before interest and taxes.
Track your net profit with Xero
Knowing your net profit starts with organised, accurate records. Xero's accounting software pulls your transactions into real-time reports, so you can see exactly where you stand. Ready to take control of your numbers? Get one month free and start tracking profitability today.
FAQs on net profit
Below are answers to common questions about net profit and related concepts.
What is the difference between gross profit and net profit?
Gross profit is revenue minus cost of goods sold, while net profit subtracts all remaining expenses including operating costs, interest and taxes. Net profit gives a fuller picture of overall profitability.
Is net profit the same as net income?
Yes. Net profit, net income and net earnings all refer to the money left after subtracting every expense from revenue.
Is net profit the same as taxable income?
Not always. Taxable income is calculated according to tax rules, which may allow deductions or adjustments that differ from standard accounting. Net profit on your financial statements and taxable income on your tax return can vary.
What is a good net profit margin?
It depends on your industry. Generally, 5% is considered low, 10% is average and 20% or higher is strong. Compare your margin to sector benchmarks for a meaningful assessment.
Why might a business have high revenue but low net profit?
High revenue can be offset by high costs. Expensive raw materials, large overheads, significant debt interest or heavy tax obligations can all erode profit despite strong sales.
Can net profit be negative?
Yes. A negative net profit is called a net loss. It means total expenses exceeded total revenue during the period.
Related terms
Learn more about net profit
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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.