Net profit (calculation)
Learn what net profit is, the formula to calculate it, and how to work out your net profit margin.
Published Monday 17 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 over after you subtract all expenses from your total revenue, including operating costs, interest and taxes.
- The formula is: net profit = total revenue − total expenses (or revenue − cost of goods sold − operating expenses − interest − taxes).
- Net profit margin shows your net profit as a percentage of revenue, helping you compare profitability across different periods or against industry benchmarks.
- Tracking net profit regularly helps you make informed decisions about pricing, spending and business growth.
What is net profit?
Net profit is the amount of money your business keeps after deducting all expenses from total revenue. It's also known as net income, net earnings or the bottom line.
Unlike gross profit, which only accounts for the cost of goods sold, net profit reflects what remains after you subtract all remaining costs. This includes operating expenses such as rent and wages, interest on loans and taxes owed to Revenue. Net profit gives you the clearest picture of your actual earnings.
The net profit formula
You can express the net profit formula in two ways. The simplified version is:
Net profit = total revenue − total expenses
For a more detailed breakdown, use:
Net profit = revenue − cost of goods sold − operating expenses − interest − taxes
How to calculate net profit
Calculating net profit involves working through your income statement step by step. Start with your total revenue and subtract each category of expenses in turn.
- Add up all your revenue for the period.
- Subtract your cost of goods sold (COGS) to get your gross profit.
- Subtract your operating expenses, such as rent, utilities and wages.
- Subtract any interest payments on loans or credit.
- Subtract your taxes to arrive at your net profit.
Here's a worked example using euros. Say your business earns €20,000 in revenue. Your cost of goods sold is €8,000, leaving a gross profit of €12,000. You then subtract €3,000 in operating expenses, €500 in interest and €4,000 in taxes. Your net profit is €4,500.
Net profit vs gross profit vs operating profit
These three profit measures each tell you something different about your business. Understanding the distinction helps you gauge profitability at different stages.
- Gross profit: revenue minus cost of goods sold. It shows how efficiently you produce or source your products.
- Operating profit: gross profit minus operating expenses, but before interest and taxes. It reflects how well your core business operations perform.
- Net profit: what remains after all expenses, including interest and taxes. It's the truest measure of your overall profitability.
What is net profit margin?
Net profit margin expresses your net profit as a percentage of revenue. It's a useful way to assess how much of every euro earned actually stays in your business. You can learn more about what profit margin means for your finances.
The formula is:
Net profit margin = (net profit ÷ revenue) × 100
Using the earlier example: €4,500 ÷ €20,000 × 100 = 22.5%. This means you keep 22.5 cent of every euro earned after all expenses.
What counts as a good margin varies by industry. A common rule of thumb treats around 5% as low, 10% as healthy and 20% or above as high, though this differs depending on your sector.
Why net profit matters
Net profit is one of the most important figures on your income statement. It shows whether your business is financially sustainable and has room to grow. For a deeper dive, explore profitability ratios and how they apply to your business.
- Shows what you can reinvest in the business or take as drawings.
- Guides pricing decisions by revealing whether your margins are healthy.
- Matters to lenders and investors when assessing your creditworthiness.
- Tracks your financial health over time so you can spot trends early.
How to improve your net profit
Boosting net profit comes down to increasing revenue, reducing costs or both. Small changes in several areas often add up to a noticeable difference. You might also consider how net operating profit after tax fits into your overall financial picture.
- Reduce overheads by reviewing subscriptions, utilities and supplier contracts.
- Review your pricing to ensure it reflects your costs and the value you provide.
- Drop low-margin products or services that drain resources without adequate return.
- Improve efficiency through automation, better processes or staff training.
Track your net profit with Xero
Xero's financial reports give you a clear view of your net profit whenever you need it. You can generate profit and loss statements in seconds, compare periods and see exactly where your money goes. Ready to take control of your numbers? Get one month free and see how Xero helps you stay on top of your finances.
FAQs on net profit
Here are answers to common questions about net profit and how it applies to your business.
Does net profit include tax?
No, net profit is calculated after taxes have been deducted. It represents the final amount remaining once all expenses, including tax, are paid.
Is net profit the same as net income?
Yes, the two terms are interchangeable. Net income, net earnings and the bottom line all refer to the same figure.
What's the difference between gross profit and net profit?
Gross profit is revenue minus the cost of goods sold. Net profit goes further by also subtracting operating expenses, interest and taxes.
What is a good net profit margin?
It depends on your industry. Generally, 5% is considered low, 10% healthy and 20% or above is strong, but benchmarks vary widely across sectors.
Is net profit before or after tax?
Net profit is after tax. Profit before tax is a separate figure, sometimes called earnings before tax or EBT.
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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.