Net profit
Net profit is what your business keeps after all costs. Learn how to calculate, benchmark and improve it.
Published Thursday 6 August 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 your business keeps after subtracting all expenses, including operating costs, interest and taxes, from total revenue.
- Working out your net profit regularly shows whether your business is genuinely profitable and where your money is going.
- A healthy net profit margin varies by industry, and many small businesses treat around 10% as a solid general benchmark.
- You can lift net profit by reviewing your pricing, cutting unnecessary costs and running day-to-day operations more efficiently.
What is net profit?
Net profit is the total amount of money your business earns after deducting all expenses from your revenue. It's also known as net income, net earnings or the bottom line.
Unlike gross profit, which only accounts for the direct cost of producing your goods or services, net profit factors in every expense your business incurs. That includes operating costs, interest on loans, depreciation and taxes.
For small business owners, net profit is one of the most important figures on your profit and loss statement. It tells you whether your business is actually making money once everything has been paid for. When your net profit is healthy, you've got room to reinvest, build savings or pay yourself more.
Why net profit matters
Net profit is the clearest single measure of whether your business is sustainable. Revenue shows how much you sell, but net profit shows what you actually keep.
Tracking it over time tells you a few important things:
- Whether your business can fund its own growth without extra borrowing
- How much you can safely reinvest, save or draw as owner's income
- Where costs are quietly eating into your earnings
- How your profitability compares from one period to the next
Net profit vs gross profit
Gross profit and net profit both measure profitability, but they tell you different things about your business. Understanding the distinction helps you spot where money is being lost.
- Gross profit is your total revenue minus the cost of goods sold (COGS). It shows how efficiently you produce or deliver your products and services.
- Net profit is your gross profit minus all remaining expenses, including rent, salaries, utilities, marketing, interest and taxes. It shows your overall profitability.
- Gross profit focuses on production costs only, while net profit gives you the full picture of what's left after every business expense.
- A strong gross profit with a weak net profit suggests your overhead or operating costs are too high.
- A weak gross profit usually means your pricing is too low or your direct costs are too high.
In short, gross profit helps you evaluate your core product or service. Net profit tells you whether your business as a whole is financially sustainable.
How to calculate net profit
Net profit is worked out by subtracting all of your business expenses from your total revenue. The net profit formula is:
Net profit = total revenue − total expenses
You can also express it as:
Net profit = gross profit − operating expenses − interest − taxes − depreciation
Here's how to work through it step by step.
- Start with your total revenue for the period. This is all the income your business has earned from sales, before any deductions.
- Subtract your cost of goods sold (COGS). This gives you your gross profit. COGS includes raw materials, manufacturing costs and any expenses directly tied to producing your product or service.
- Subtract your operating expenses. These are the day-to-day costs of running your business, such as rent, utilities, salaries, marketing and office supplies.
- Subtract interest payments. If you have business loans or credit, include the interest you've paid during the period.
- Subtract taxes. In Hong Kong, this is mainly profits tax on your assessable profits.
- Subtract depreciation and amortisation. These account for the gradual loss in value of your business assets over time.
The figure you're left with is your net profit. If it's a positive number, your business made money. If it's negative, you've made a net loss.
Net profit example
A worked example makes the net profit calculation easier to follow. Here's how it might look for a small Hong Kong business, using illustrative figures.
Imagine you run a small online retail business. In a given quarter, your finances look like this:
- Total revenue: HK$120,000
- Cost of goods sold: HK$48,000
- Operating expenses (rent, salaries, marketing, utilities): HK$38,000
- Interest on a business loan: HK$2,000
- Profits tax: HK$6,000
- Depreciation: HK$1,000
First, calculate your gross profit: HK$120,000 − HK$48,000 = HK$72,000.
Then subtract the remaining expenses: HK$72,000 − HK$38,000 − HK$2,000 − HK$6,000 − HK$1,000 = HK$25,000.
Your net profit for the quarter is HK$25,000. That's the amount your business has genuinely earned after covering every cost.
What is a good net profit margin?
Net profit margin is the percentage of your revenue that ends up as net profit. It's one of the clearest ways to measure how efficiently your business turns sales into actual earnings.
The formula is:
Net profit margin = (net profit ÷ total revenue) × 100
Using the example above, that would be: (HK$25,000 ÷ HK$120,000) × 100 = 20.8%.
What counts as a good margin depends on your industry. In the NYU Stern net margins by sector dataset (US publicly traded companies, updated January 2026), service-based sectors tend to post higher net margins than retail and hospitality, which run tighter. Hong Kong small-business margins will differ from these US averages, so treat them as a guide rather than a target.
As a general rule, a net profit margin of around 10% is often seen as solid for many small businesses, though what counts as healthy varies by sector. If your margin is below 5%, it's worth reviewing your expenses and pricing to find areas to improve.
How to improve your net profit
Improving your net profit doesn't always mean earning more revenue. Often the fastest gains come from cutting unnecessary costs and running your business more efficiently. Here are some practical steps to consider.
- Review your pricing regularly so your prices reflect current costs, market rates and the value you deliver. Even small increases can noticeably lift your bottom line.
- Reduce operating expenses by finding savings on rent, utilities, subscriptions and supplies, or by negotiating with suppliers.
- Manage your inventory carefully, because overstocking ties up cash and can lead to waste. Track what's selling and adjust your orders accordingly.
- Automate repetitive tasks such as invoicing, bank reconciliation and expense tracking to save time and reduce costly errors.
- Monitor your profitability with financial reporting tools every month, so you catch problems early and make informed decisions before small issues become expensive ones.
The goal is to build habits that protect your margins over time, rather than making a one-off fix. Small, consistent improvements add up, and it helps to measure your profitability at regular intervals.
Track your net profit with Xero
Keeping a close eye on your net profit is easier when your financial data is accurate, up to date and in one place. Xero's cloud accounting software automates bank reconciliation, tracks expenses and generates profit and loss reports, so you can see where your business stands.
With real-time dashboards and clear reporting, you can spend less time on manual bookkeeping and more time making decisions that support your growth. Start today and get one month free.
FAQs on net profit
Here are some questions about net profit that small business owners commonly ask.
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 all expenses, interest and taxes have been subtracted from your total revenue.
Do you pay tax on net profit in Hong Kong?
In Hong Kong, businesses pay profits tax on their assessable profits, which is based on net profit with some tax adjustments. Corporations pay 8.25% on the first HK$2 million of assessable profits and 16.5% above that, while unincorporated businesses pay 7.5% and 15%.
Is net profit the same as assessable profit?
Not exactly. Assessable profit is your net profit adjusted for tax purposes, so items like non-deductible expenses and depreciation allowances can make the two figures differ.
What is operating profit?
Operating profit is your revenue minus operating expenses, but before interest and tax are deducted. It's useful for measuring how well your core business activities are performing, separate from financing costs and tax.
How often should you review your net profit?
Reviewing your net profit monthly gives you the best visibility into your business performance. Monthly reviews help you spot trends, catch issues early and adjust your strategy before problems grow.
What does a negative net profit mean?
A negative net profit means your total expenses exceeded your total revenue during that period, resulting in a net loss. It doesn't necessarily mean your business is failing, but it's a signal to review your costs and revenue streams promptly.
Related terms
Learn more about net profit
Handy resources
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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.