Net profit
Learn what net profit is, how to calculate it, and what a healthy net profit margin looks like for your business.
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’s left from total revenue after you subtract cost of goods sold, operating expenses, interest and tax
- Gross profit only removes direct costs, so it’s usually much higher than net profit
- Net profit margin shows how much of each ringgit you keep, and a healthy figure depends on your industry
- Checking net profit regularly helps you spot rising costs early and gives lenders confidence in your business
What is net profit?
Net profit is what’s left from your total revenue after you subtract cost of goods sold (COGS), operating expenses, interest and tax. It’s also called net income or net earnings, and many people call it the bottom line.
A positive figure means your business earned more than it spent in that period. A negative figure is a net loss, which means your costs were higher than your revenue.
Think of it like your take-home pay. Revenue is your salary before deductions, and net profit is the amount that actually lands in your bank account.
Net profit formula
The basic formula takes everything you spent away from everything you earned.
Net profit = total revenue – total expenses
To see where your money goes, you can expand the formula into its parts.
Net profit = total revenue – COGS – operating expenses – interest – tax
Each part of the formula covers a different kind of cost.
- 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, such as ingredients or stock
- Operating expenses are the costs of running your business, such as rent, salaries, utilities and marketing
- Interest is what you pay on business loans and overdrafts
- Tax is the income tax you pay to the Inland Revenue Board of Malaysia (LHDN)
For year of assessment (YA) 2026, qualifying small and medium enterprise (SME) companies pay 15% on the first RM150,000 of chargeable income. The next RM450,000 is taxed at 17% and anything above that at 24%. Other resident companies pay a flat 24%, according to PwC’s Malaysia tax summary.
LHDN works out your tax on chargeable income, which is your accounting profit adjusted under tax rules, so check your figures with your tax agent. The figure you get before deducting tax is called profit before tax, and it’s useful for comparing years with different tax bills.
How to calculate net profit
You can work out net profit in five steps, using figures from your accounting records for a set period such as a month or quarter.
1. Add up your total revenue
Start with all the money your business earned from sales during the period. Check what counts as revenue so you include every sale and leave out items such as loans or owner contributions.
2. Calculate your cost of goods sold (COGS)
Next, total the direct costs of producing or buying the goods you sold. For a cafe, that’s coffee beans and food ingredients, and subtracting COGS from revenue gives you gross profit.
3. Add up your operating expenses
Add up the everyday costs of keeping your business running. These include rent, staff wages, utilities and software subscriptions.
4. Include interest and tax
Add any interest you paid on loans or overdrafts during the period. Then include your income tax, or an estimate of it if you haven’t filed your return yet.
5. Subtract all expenses from total revenue
Take all your expenses away from total revenue. The result is your net profit, or a net loss if the figure is negative.
If you’re using Xero accounting software, the profit and loss report calculates net profit for you automatically from your transactions.
Net profit example
Here’s how the formula works for a small cafe in Kuala Lumpur over one quarter. The cafe brings in RM120,000 in revenue and pays out:
- RM40,000 in COGS for coffee and food ingredients
- RM55,000 in operating expenses, including rent and staff wages
- RM2,000 in interest on a business loan
- RM5,000 in income tax
Net profit = RM120,000 – RM40,000 – RM55,000 – RM2,000 – RM5,000 = RM18,000
So the cafe keeps RM18,000 after paying every cost in the quarter.
Net profit vs gross profit
Gross profit is what’s left after you subtract only COGS from revenue. Net profit goes further and takes away every other cost as well.
Gross profit tells you how well your pricing covers the cost of what you sell. Net profit shows whether the whole business makes money once overheads, interest and tax are paid.
For the Kuala Lumpur cafe, gross profit is RM80,000 (RM120,000 – RM40,000), while net profit is RM18,000. This profit and loss statement example shows how both lines appear in a real report layout.
Net profit vs operating profit
Operating profit sits between gross profit and net profit. It’s gross profit minus operating expenses, measured before interest and tax, and it’s similar to earnings before interest and tax (EBIT).
Operating profit = gross profit – operating expenses
For the cafe, operating profit is RM80,000 – RM55,000 = RM25,000. Take away RM2,000 in interest and RM5,000 in tax, and you’re left with RM18,000 in net profit.
Operating profit shows how your core business performs, whatever your loan or tax position. You can learn how to calculate operating profit step by step.
A related measure, net operating profit after tax, removes the effect of debt so you can compare businesses with different financing.
What is net profit margin?
Net profit margin shows net profit as a percentage of revenue. It tells you how much of each ringgit you keep after all costs.
Net profit margin = (net profit / total revenue) x 100
The cafe’s margin is (RM18,000 / RM120,000) x 100 = 15%, so it keeps 15 sen of every ringgit it earns. You can check your own figure with the Xero net profit margin calculator.
Gross margin uses gross profit instead, so it’s usually higher. The cafe’s gross margin is 66.7%, which shows how much overheads, interest and tax take from each sale.
Lenders and investors often look at net profit margin to judge how efficiently a business turns sales into profit. Net profit margin is one of several profitability ratios worth tracking.
What is a good net profit margin?
A good net profit margin depends on your industry, because some sectors run on thin margins and high sales volumes. As a rule of thumb from Brex, 5% is low, 10% is healthy and 20% is high.
Industry data shows how wide the spread can be. NYU Stern data from January 2026 on US publicly listed companies puts the total market average net margin at 9.74%. Sector averages include:
- grocery and food retail at 1.32%
- general retail at 5.61%
- restaurants at 9.37%
- software at 25.49%
These figures come from large US listed companies, so Malaysian small-business margins may differ. Compare your margin with your own past results, and ask your accountant what’s realistic for your sector.
For a broader view, see how profit margin works across gross, operating and net levels.
Why gross profit can be strong but net profit low
A strong gross profit shows your pricing covers your direct costs. Net profit can still come in low when other costs absorb that margin, such as:
- high overheads, like rent and payroll
- interest on business loans and overdrafts
- tax on your chargeable income
- one-off costs, like equipment repairs or legal fees
- merchant and transaction fees on card and online payments
Comparing gross and net profit helps you spot expense leakage, where small costs add up unnoticed. If your gross margin holds steady while your net margin falls, look at overheads and fees first.
Why net profit matters for your business
Net profit shows whether your business can sustain itself over the long term. A steady positive figure means you can cover your costs, reinvest and build a cash buffer.
Banks and other lenders check net profit to see whether you can repay a loan. Investors use it to judge returns, and it plays a big part in valuing your business if you ever sell.
Tracking net profit over time also helps you spot trends, such as costs rising faster than sales. You can measure profitability in other ways too, or record your monthly figures in a profit and loss template.
How to improve your net profit
You can lift net profit by earning more from each sale or spending less to make it. Here are some practical ways to start.
- Review your pricing. Check that your prices keep pace with your costs and reflect the value you offer.
- Cut unnecessary expenses. Go through your subscriptions and supplier contracts, and drop anything you no longer use.
- Improve your gross margin. Negotiate better supplier prices or reduce waste so each sale keeps more money.
- Automate repetitive tasks. Automating bank reconciliation and invoicing frees up hours for work that earns money.
- Make paying you simple. Offering online invoice payments makes it easier for customers to pay on time.
- Monitor your numbers regularly. Review your profit and loss statement each month to spot changes early.
Explore more ways to increase profits by growing revenue and margins.
Track your net profit with Xero
Knowing your net profit helps you make confident decisions about pricing and spending. With Xero, your profit and loss report updates as bank transactions come in, so you can check where you stand anytime.
Try Xero today and get one month free.
FAQs on net profit
Here are answers to common questions about net profit.
What is the difference between net profit and net income?
In small business reporting, they usually mean the same thing: the amount left after all expenses, interest and tax. Formal financial statements often use ‘net income’, while business owners tend to say ‘net profit’.
Can net profit be negative?
Yes, a negative figure is called a net loss. It’s common in early months or during heavy investment, and a run of losses is a signal to review your pricing and costs.
Is net profit the same as cash flow?
Net profit records sales and costs when they happen, while cash flow tracks when money moves in and out of your bank. Unpaid invoices can leave a profitable business short of cash.
How often should you calculate net profit?
Most small businesses check net profit monthly and review it in more depth each quarter and at year end. Monthly checks help you catch rising costs before they build up.
Does net profit include tax?
Yes, net profit is calculated after income tax. Malaysian companies generally pay tax in monthly instalments based on an estimate, so monthly net profit may use estimated tax until your return is final.
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.