What is net profit?

Published Tuesday 14 July 2026

Table of contents

• What is net profit?
• Net profit vs gross profit
• How to calculate net profit
• Net profit example
• What is a good net profit margin?
• How to improve your net profit
• Simplify your profit tracking with Xero
• FAQs on net profit

Key takeaways

• Net profit is the amount of money your business keeps after subtracting all expenses, including operating costs, taxes and interest, from total revenue.
• Calculating your net profit regularly helps you understand whether your business is genuinely profitable and where your money is going.
• A healthy net profit margin varies by industry, but many small businesses in the UK aim for 10% or higher as a general guideline.
• You can improve your net profit by reducing unnecessary costs, reviewing your pricing and streamlining day-to-day operations.

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, taxes, interest on loans and depreciation.

For small business owners, net profit is one of the most important numbers on your profit and loss statement. It tells you whether your business is actually making money once everything has been paid for. If your net profit is healthy, you've got room to reinvest, build savings or pay yourself more.

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're producing or delivering your products and services.
• Net profit is your gross profit minus all remaining expenses, including rent, salaries, utilities, marketing, taxes and interest. It shows your overall profitability.
• Gross profit focuses on production costs only. 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 calculated 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 - taxes - interest - depreciation

Here's how to work through it step by step.

1. Start with your total revenue for the period. This is all the income your business has earned from sales, before any deductions.
2. 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.
3. Subtract your operating expenses. These are the day-to-day costs of running your business, such as rent, utilities, salaries, marketing and office supplies.
4. Subtract interest payments. If you have business loans or credit, include the interest you've paid during the period.
5. Subtract taxes. This includes corporation tax and any other taxes your business owes.
6. 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 UK business (figures are illustrative).

Imagine you run a small online retail business. In a given quarter, your finances look like this:

• Total revenue: £120,000
• Cost of goods sold: £48,000
• Operating expenses (rent, salaries, marketing, utilities): £38,000
• Interest on a business loan: £2,000
• Corporation tax: £6,000
• Depreciation: £1,000

First, calculate your gross profit: £120,000 - £48,000 = £72,000.

Then subtract the remaining expenses: £72,000 - £38,000 - £2,000 - £6,000 - £1,000 = £25,000.

Your net profit for the quarter is £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 converts sales into actual earnings.

The formula is:

Net profit margin = (net profit / total revenue) x 100

Using the example above, that would be: (£25,000 / £120,000) x 100 = 20.8%.

What counts as a "good" margin depends on your industry. Based on industry data, service-based businesses such as consultancies and agencies often see margins of 15% to 30% because their direct costs tend to be lower. Retail and hospitality businesses typically operate on tighter margins, often between 3% and 10%.

As a general guideline, a net profit margin of 10% or higher is often cited 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 for improvement.

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. Make sure your prices reflect current costs, market rates and the value you deliver. Even small increases can have a noticeable impact on your bottom line.
• Reduce operating expenses. Look for savings on rent, utilities, subscriptions and supplies. Negotiate with suppliers or switch to more cost-effective alternatives.
• Manage your inventory carefully. Overstocking ties up cash and can lead to waste. Track what's selling and adjust your orders accordingly.
• Automate repetitive tasks. Using accounting software to handle invoicing, bank reconciliation and expense tracking saves time and reduces costly errors.
• Monitor your profit and loss statement monthly. Regular reviews help 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, not just make a 1-off fix. Small, consistent improvements add up.

Simplify your profit tracking with Xero

Keeping a close eye on your net profit is easier when your financial data is accurate, up to date and in 1 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 smart reporting, you can spend less time on manual bookkeeping and more time making decisions that support your business growth. Get one month free.

FAQs on net profit

Here are some frequently asked 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, taxes and interest have been subtracted from your total revenue.

Do you pay tax on net profit in the UK?

In the UK, limited companies pay corporation tax on their taxable profits, which is closely related to net profit. Sole traders pay income tax on their profits through self assessment, and Making Tax Digital (MTD) for Income Tax is being phased in, which will change how profits are reported to HMRC.

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 obligations.

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.