Net profit (calculation)
Learn how to calculate net profit and net profit margin to track your business's bottom line.
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 amount of money left after subtracting all expenses from total revenue, including cost of goods sold, operating expenses, interest and taxes.
- The formula is: net profit = total revenue − total expenses.
- Net profit margin shows how much of each ringgit of revenue you keep as profit, calculated as (net profit ÷ revenue) × 100.
- Tracking net profit helps you understand your business's true profitability and make informed decisions about growth, investment and cash flow.
What is net profit?
Net profit is the amount remaining after you subtract all expenses from your total revenue. It equals gross profit minus operating expenses, interest and taxes, making it the final figure on your income statement. Net profit is also called net income, net earnings or the bottom line.
The net profit formula
You can express net profit in a simple equation or break it down into its component parts.
- Net profit = total revenue − total expenses
- 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 line by line. Follow these steps to find your net profit.
- Add up your total revenue from all sales and other income sources.
- Subtract the cost of goods sold to find your gross profit.
- Subtract operating expenses such as rent, wages, utilities and marketing.
- Subtract interest payments and taxes to reach your net profit.
Example of a net profit calculation
Here's how a Malaysian small business might calculate net profit for a month.
- Total revenue from product sales: RM20,000
- Cost of goods sold: RM8,000
- Gross profit: RM12,000 (RM20,000 − RM8,000)
- Operating expenses: RM3,000
- Taxes: RM4,000
- Net profit: RM5,000 (RM12,000 − RM3,000 − RM4,000)
How to calculate net profit margin
Net profit margin shows what percentage of revenue remains as profit after all expenses. To measure your profitability, use this formula.
- Net profit margin = (net profit ÷ revenue) × 100
For example, if your net profit is RM5,000 on revenue of RM20,000, your net profit margin is 25%. This means you keep RM0.25 of every RM1 of revenue. You can find more detail on this formula in the Corporate Finance Institute's guide.
What is a good net profit margin?
There's no single "good" margin because profitability varies widely by industry. The average net profit margin across US publicly traded companies was 9.74% as of January 2026, ranging from around 1% in grocery retail to more than 25% in software. These are US public-company figures, and margins for Malaysian small businesses can differ significantly based on local market conditions.
As a rule of thumb, 5% is considered low, 10% healthy and 20% high. You can compare your results against industry benchmarks using profitability ratios.
Net profit vs gross profit
Gross profit and net profit measure profitability at different stages. Understanding both helps you see where your money goes.
- Gross profit = revenue − cost of goods sold
- Net profit = gross profit − operating expenses − interest − taxes
Gross profit tells you how much you earn from selling goods or services before other costs. Net profit shows what remains after paying all your business expenses.
Why net profit matters
Net profit is the bottom line of your profit and loss statement, and it reveals your business's true earning power. Tracking it helps you make informed decisions about where to invest, whether to reinvest in the business or take a distribution, and how to increase your net profit over time.
Lenders and investors look at net profit to assess your business's financial health. Keeping accurate financial statements ensures you can demonstrate profitability when seeking funding or evaluating performance.
Track your net profit with Xero
Monitoring net profit shouldn't mean hours of manual calculations. Xero's accounting software generates profit and loss reports automatically, so you can see your net profit in real time. To try Xero for your business, get one month free.
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 profit and net profit?
Gross profit is revenue minus cost of goods sold, while net profit subtracts all remaining expenses including operating costs, interest and taxes. Net profit gives a fuller picture of your profitability.
How do you calculate net profit margin?
Divide net profit by total revenue and multiply by 100. The result is a percentage showing how much of each ringgit earned you keep as profit.
What is a good net profit margin?
It varies by industry. A 10% margin is often considered healthy, but software companies may exceed 25% while grocery retailers may operate on 1–2%.
Is net profit the same as taxable income?
No. For Malaysian businesses, taxable income is calculated under the Income Tax Act 1967 as administered by LHDN and usually differs from net profit in your accounts. Consider consulting a tax professional for guidance.
Why is net profit called the bottom line?
Net profit appears at the bottom of the income statement after all revenues and expenses have been accounted for. It's the final number that shows what your business actually earned.
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.