Net profit
Net profit is what your business keeps after every cost and tax bill. Learn how to work it out, with Irish examples.
Published Wednesday 30 September 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 what your business keeps after taking cost of goods sold, operating expenses, interest and tax away from revenue
- In Ireland, companies deduct corporation tax, while sole traders deduct income tax, Universal Social Charge (USC) and Pay Related Social Insurance (PRSI)
- Net profit sits below gross profit and operating profit on your profit and loss statement, so comparing them shows where your money goes
- Net profit margin shows how many cent of each euro in sales you keep, and lenders and investors use it to judge financial health
What is net profit?
Net profit is revenue minus all your business costs, including cost of goods sold (COGS), operating expenses, interest and tax. It’s also called net income or the bottom line, because it’s the last line on your profit and loss statement.
Think of it as what’s left in the till after you’ve paid for stock, rent, staff, loan interest and your tax bill. A positive figure means you’re earning more than you spend. A negative figure is a net loss.
Net profit formula
The simple formula takes everything you spend away from everything you earn:
Net profit = total revenue − total expenses
The expanded formula breaks those expenses into their parts, so you can see which costs are shaping your bottom line:
Net profit = total revenue − COGS − operating expenses − interest − taxes
Total revenue is all the money you earn from selling goods and services. COGS is the direct cost of making or buying what you sell. Operating expenses are the costs of running the business, such as rent, wages, insurance and software.
Interest is what you pay on loans, overdrafts and other borrowing. Taxes cover what you owe Revenue: corporation tax for a company, or income tax, USC and PRSI if you’re a sole trader.
How to calculate net profit
You can work out net profit in five steps. Use figures from the same period, such as a month, quarter or year.
- Add up your total revenue. Include all the revenue you earned from selling goods and services during the period.
- Calculate your COGS. Add up the direct costs of what you sold, such as stock and materials; this guide to cost of goods sold explains what counts.
- Add up your operating expenses. Include running costs like rent, wages, insurance, marketing and software subscriptions.
- Include interest and tax. Add interest on loans or overdrafts, plus the tax you owe on the period’s profit.
- Subtract all expenses from revenue. Take the totals from steps 2–4 away from your revenue to get net profit. Xero accounting software works this out for you in the profit and loss report.
Net profit example
Say you run a small café in Dublin, set up as a limited company. Here’s how net profit works out over one quarter.
Your café brings in €120,000 in revenue. Coffee, milk, food and other stock cost €40,000, and operating expenses such as rent, wages and utilities come to €55,000. You also pay €2,000 in interest on a business loan.
Subtract each cost from revenue: €120,000 − €40,000 − €55,000 − €2,000 = €23,000. That’s your profit before tax.
As a company, the café pays corporation tax at the 12.5% trading rate: €23,000 × 12.5% = €2,875. Take that away and you’re left with €23,000 − €2,875 = €20,125 net profit. To keep the example simple, it applies the annual rate to one quarter’s profit.
Net profit vs gross profit vs operating profit
These figures sit at different points on your profit and loss statement, and each one removes another layer of cost. Here’s how they compare using the café example.
- Gross profit is revenue minus COGS, so the café’s gross profit is €120,000 − €40,000 = €80,000
- Operating profit is gross profit minus operating expenses, which gives €80,000 − €55,000 = €25,000
- Profit before tax is operating profit minus interest, which gives €25,000 − €2,000 = €23,000
- Net profit is profit before tax minus tax, which leaves €20,125
Gross profit tells you whether your prices cover the direct cost of what you sell. Net profit tells you whether the whole business, including debt and tax, pays its way.
Is net profit before or after tax?
Net profit is an after-tax figure. It’s what remains once corporation tax, or income tax, USC and PRSI for a sole trader, has come off.
Profit before tax is a separate line above it. In the café example, profit before tax is €23,000 and net profit is €20,125. Some businesses and reports quote net profit before tax, so check which figure is meant before you compare numbers.
What is net profit margin?
Net profit margin shows net profit as a percentage of revenue. It tells you how much of each euro in sales you keep.
Net profit margin = (net profit ÷ total revenue) × 100
For the café, that’s (€20,125 ÷ €120,000) × 100 = 16.8%, or about 17 cent of every euro. You can check your own figures with this net profit margin calculator.
Lenders and investors also look at it when they assess your business’s financial health. A rising margin usually means costs are under control, while a falling one is a prompt to review pricing and overheads.
Why gross profit can be healthy while net profit is low
A strong gross profit shows your pricing covers direct costs. Net profit can still be thin when costs lower down your accounts eat into it.
The usual causes are overheads like rent and wages, interest on loans, one-off expenses such as equipment repairs, and tax. A café with busy tables and good margins on coffee can still struggle if its rent rises sharply.
To spot the gap, read your profit and loss statement from top to bottom. Compare gross profit with operating profit to see how much overheads take, then check the interest and tax lines below. This profit and loss statement example shows where each line sits.
What happens to net profit after it’s calculated
Net profit is the starting point for decisions about tax, your own pay and growth. First, check the figure includes non-operating income, such as interest earned on a deposit account, because that also feeds into profit.
A company pays corporation tax to Revenue on its profits. The directors can then pay some of what’s left to shareholders as dividends.
Sole traders take money out of the business as drawings. Your tax bill is based on the business’s profit, however much of it you draw.
Any profit you keep in the business becomes retained profits. You can reinvest them in equipment, stock or staff, or hold them as a buffer for quieter months.
Why net profit matters for your business
Net profit gives you the fullest picture of how your business is performing. Here’s what it helps you do.
- Shows whether your business can sustain itself over the long term
- Gives lenders and investors a clear view of your profitability when you apply for finance
- Shapes how buyers value your business if you decide to sell
- Helps you set budgets and decide when you can afford to hire
Tracking net profit over time also shows trends, such as costs creeping up faster than sales. Find out how to measure profitability in other ways, or set up your figures with this profit and loss template.
How to improve your net profit
You can raise net profit by charging more, spending less or both, and this guide covers more ways to increase profits. Here are practical ways to do it.
- Review your pricing. A small rise on your best-selling products can lift your margin without needing extra sales.
- Cut unnecessary expenses. Check subscriptions, suppliers and recurring bills, and use these cost-saving ideas for places to start.
- Improve your gross margin. Negotiate better supplier terms or reduce waste so each sale costs less to deliver.
- Automate repetitive tasks. Bank feeds and automatic invoice reminders free up admin hours you’d otherwise pay for.
- Collect payments sooner. Xero customers who use online invoice payments get paid up to twice as fast, which can reduce your need for borrowing.
- Monitor your numbers monthly. Review your profit and loss statement each month to catch rising costs early.
Track your net profit with Xero
Net profit shows whether your business pays its way once every cost and tax bill is covered. Xero’s profit and loss report calculates it for you, with bank feeds keeping your transactions up to date.
You can customise the report to compare periods and spot trends early. Sign up today to get one month free and see your bottom line whenever you need it.
FAQs on net profit
Here are answers to common questions about net profit.
What is a good net profit margin?
It depends on your sector, but a common rule of thumb treats 5% as low, 10% as healthy and 20% as high. Compare your margin with businesses in your own industry, since a café and a consultancy have very different cost structures.
Is net profit the same as net income?
Yes, both describe the same bottom-line figure. You’ll often see net income on company reports and in accounting software, so treat the two as the same when comparing figures.
Can net profit be negative?
Yes, a negative figure is a net loss, meaning your costs were higher than your revenue for the period. A single loss-making quarter can reflect seasonal costs or a one-off purchase, so look at the trend across several periods.
Is net profit the same as cash in the bank?
No, net profit records sales and costs when you earn or incur them, while your bank balance changes when money actually moves. Unpaid invoices, loan repayments and stock purchases can all make the two figures differ.
How often should you calculate net profit?
Monthly is a good baseline, with a quarterly check against your budget. You’ll also need a full-year figure for your annual accounts and tax return.
Related terms
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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.