How to calculate net profit

Published Monday 17 August 2026

Table of contents

• What is net profit?
• The net profit formula
• What's included in net profit
• How to calculate net profit
• Net profit calculation example
• Net profit vs gross profit
• Net profit vs net income
• What is net profit margin?
• Why net profit matters
• How to improve your net profit
• Track your net profit with Xero
• FAQs on net profit
• Related terms
• Learn more about net profit

Key takeaways

• Net profit is your total revenue minus all expenses, including cost of goods sold, operating expenses, interest and taxes.
• The formula is straightforward: net profit = total revenue − total expenses. A negative result means your business made a loss.
• Net profit differs from gross profit, which only subtracts the cost of goods sold from revenue.
• Understanding your net profit helps you make informed decisions about pricing, cost management and business growth.

What is net profit?

Net profit is the amount of money your business keeps after subtracting all expenses from total revenue. It's often called net income, net earnings or the bottom line because it appears at the bottom of your income statement.

This figure shows the true profitability of your business. While revenue tells you how much money came in, net profit reveals how much you actually earned after paying for everything it takes to run your operations.

The net profit formula

You can calculate net profit using two forms of the same formula, depending on what figures you have available.

The basic formula is:

Net profit = total revenue − total expenses

If you already know your gross profit, you can use this alternative:

Net profit = gross profit − operating expenses − interest − taxes

Both formulas give you the same result. The first works directly from your revenue and expense totals, while the second builds on your gross profit figure.

What's included in net profit

Net profit accounts for every cost your business incurs. You can use financial reports to track these figures over time. When calculating net profit, subtract all of the following from your revenue:

• cost of goods sold (materials, labour and production costs directly tied to your products or services)
• operating expenses (rent, utilities, salaries, marketing and administrative costs)
• interest payments on loans or credit
• taxes owed to government authorities
• depreciation and amortisation of assets

How to calculate net profit

Working out your net profit takes just three steps. Gather your revenue and expense figures from your accounting records before you begin.

1. Total your revenue. Add up all income from sales, services and any other sources during your chosen period.
2. Add up all expenses. Include cost of goods sold, operating expenses, interest payments, taxes, depreciation and amortisation.
3. Subtract expenses from revenue. The result is your net profit. If expenses exceed revenue, you have a net loss.

Net profit calculation example

A worked example makes the calculation clearer. Consider a business with the following figures for one month.

The business sells $20,000 worth of products. The cost of goods sold is $8,000, leaving a gross profit of $12,000. Operating expenses total $3,000, and taxes amount to $4,000.

Using the formula: $12,000 − ($3,000 + $4,000) = $5,000 net profit.

Now consider what happens when costs rise. Imagine the same business in a difficult month with revenue of $15,000, cost of goods sold of $9,000, operating expenses of $4,000 and taxes of $3,000.

Gross profit: $15,000 − $9,000 = $6,000. Then: $6,000 − ($4,000 + $3,000) = −$1,000. This negative figure represents a net loss of $1,000, showing that the business spent more than it earned.

Net profit vs gross profit

Gross profit and net profit measure different things, and understanding the distinction helps you analyse your business performance. For a deeper look at gross calculations, see our guide on gross profit margin.

Gross profit equals revenue minus cost of goods sold. It shows how much you earn after covering the direct costs of producing your goods or services, but before accounting for other business expenses.

Net profit goes further by subtracting all remaining costs from gross profit, including operating expenses, interest and taxes. This gives you the complete picture of your profitability.

• Gross profit focuses on production efficiency and pricing
• Net profit reflects overall business profitability after all costs
• A healthy gross profit with a weak net profit suggests your overheads or financing costs need attention

Net profit vs net income

Net profit and net income typically mean the same thing. Both terms refer to the bottom line, which is what remains after subtracting all expenses from revenue.

You may also encounter operating profit (or earnings before interest and taxes, often abbreviated as EBIT). This measures profit from core business operations before accounting for interest and tax expenses. Operating profit sits between gross profit and net profit on your income statement.

What is net profit margin?

Net profit margin expresses your net profit as a percentage of revenue. This ratio makes it easier to compare profitability across different periods or against other businesses. You can explore other profitability ratios to get a fuller view of financial health.

The formula is:

Net profit margin = (net profit ÷ revenue) × 100

Using the earlier example: $5,000 ÷ $20,000 × 100 = 25%. This means the business keeps 25 cents of profit for every dollar of revenue.

What counts as a good net profit margin varies widely by industry. Retail businesses often operate on thin margins, while software companies may achieve much higher percentages. Compare your margin to similar businesses in your sector rather than to a single benchmark.

Why net profit matters

Net profit is one of the most important indicators of business health. It tells you whether your business model works and whether you're building sustainable value. Learning how to measure profitability gives you the foundation for sound business decisions.

For business owners, net profit shows how much you can reinvest in growth, pay yourself or set aside for leaner times. It's the clearest measure of whether your efforts are paying off.

Lenders and investors look at net profit to assess risk and potential returns. A consistent net profit makes it easier to secure financing or attract investment.

Net profit also guides decisions about pricing, hiring, expansion and cost management. Without knowing your true bottom line, you're making choices in the dark. If you're just getting started, our guide on small business accounting covers the basics you need.

How to improve your net profit

Increasing net profit comes down to earning more or spending less. Here are practical ways to move the needle.

• Reduce overhead costs by renegotiating contracts, cutting unnecessary subscriptions or moving to more affordable premises
• Lower direct costs by finding cheaper suppliers, reducing waste or improving production efficiency
• Review your pricing to ensure you're capturing the full value you deliver
• Drop unprofitable products or services that drain resources without contributing to the bottom line
• Manage inventory carefully to avoid tying up cash in slow-moving stock
• Reduce interest costs by paying down debt or refinancing at better rates
• Work with a tax professional to ensure you're claiming all eligible deductions

Track your net profit with Xero

Keeping tabs on your net profit becomes easier with accounting software that pulls your figures together automatically. Xero gives you real-time visibility into revenue, expenses and profitability so you can make confident decisions. Ready to see it in action? You can get one month free and start tracking your numbers today.

FAQs on net profit

Here are answers to common questions about net profit and how it applies to your business.

What is the difference between gross and net profit?

Gross profit is revenue minus the cost of goods sold. Net profit subtracts all remaining expenses from gross profit, including operating costs, interest and taxes. Net profit gives you the complete picture of what your business actually earns.

Is net profit the same as net income?

Yes. Net profit and net income are interchangeable terms that both refer to the bottom line. You'll see both used in financial statements and accounting discussions.

Can net profit be negative?

Yes. When your total expenses exceed total revenue, you have a negative net profit, which is called a net loss. This indicates your business spent more than it earned during that period.

Do you pay tax on gross or net profit?

Businesses typically pay tax on net profit, not gross profit. Your taxable income is calculated after deducting allowable business expenses, though specific rules vary by jurisdiction and business structure.

How can I improve my net profit?

Focus on increasing revenue through better pricing or sales volume, or reduce expenses by cutting costs and improving efficiency. Review each expense category to find opportunities, and consider whether any products or services are dragging down your overall profitability.

Related terms

• Gross profit (calculation)
• Net profit margin (calculation)

Learn more about net profit

• Profit margin: definition, types and how to calculate
• Cash flow management for small businesses
• Xero accounting software