How to calculate net profit
Net profit is what your business keeps after all expenses. Here's the formula and how to work it out.
Published Thursday 23 July 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 what's left after you subtract all your expenses from your total income. It's also called net income or the bottom line.
- The core formula is simple: net profit = total income minus all expenses. You can also work it out as gross profit minus operating expenses and taxes.
- Net profit is a dollar figure, while net profit margin turns that figure into a percentage of your revenue.
- Tracking your net profit shows how much your business really earns, which helps you make decisions and gives lenders and investors confidence.
Net profit is one of the clearest signals of how your business is doing. Here's what it means and why it sits at the heart of your finances.
What is net profit?
Net profit is what's left after you take all your expenses away from your total income. You'll also hear it called net income or the bottom line, and all three terms mean the same thing.
It's the money your business actually keeps once you've paid for everything: stock, wages, rent, interest, and tax. That's why it's the truest measure of whether you're making money.
Working out net profit comes down to one straightforward calculation. Here are the two most common ways to express it.
Net profit formula
The simplest version is: net profit = total income minus all expenses. Add up everything your business earns, then subtract every cost you've paid to run it.
You can also start from your gross profit and work down: net profit = gross profit minus operating expenses and taxes. Both routes land on the same result, so use whichever matches how you track your numbers.
Before you can calculate net profit, you need to know which costs to include. Your expenses cover more than just the price of your stock.
What expenses are included in net profit?
Net profit accounts for every cost of running your business, not just the direct costs of what you sell. When you calculate it, include the following expenses:
- cost of goods sold (COGS), the direct cost of producing what you sell
- operating expenses like rent, wages, utilities, and marketing
- interest on any loans or finance
- tax owed on your profit
- depreciation, which spreads the cost of assets over their useful life
Some of these are fixed costs that stay the same each month, like rent, while others are variable costs that rise and fall with your sales, like materials. Your accountant usually makes the depreciation adjustments for you.
Once you know your income and expenses, the calculation itself is quick. Follow these steps to work out your net profit.
How to calculate net profit: step by step
You can calculate net profit in a few clear steps, working from your total income down to the final figure.
- Add up your total income for the period.
- Subtract your cost of goods sold to find your gross profit.
- Add up all your other expenses, including operating costs, interest, and depreciation.
- Subtract those expenses from your gross profit.
- Subtract any tax owed to reach your net profit.
A worked example makes the formula easier to picture. Here's how it looks for a small business over one period.
Example of a net profit calculation
Say your business sells $20,000 of products, and those products cost $8,000 to make. Your operating expenses come to $3,000, and you owe $4,000 in taxes.
Step 1: subtract the cost of goods sold from your income. $20,000 minus $8,000 gives you $12,000 gross profit.
Step 2: subtract your operating expenses and taxes from that gross profit. $12,000 minus ($3,000 plus $4,000) leaves you with $5,000 net profit.
That $5,000 is your bottom line, the final figure on your profit and loss statement. You can pay it out to the business owners or reinvest it to help the business grow.
Gross profit and net profit both measure earnings, but they answer different questions. Here's how to tell them apart.
Gross profit vs net profit
Gross profit is your revenue minus the cost of goods sold, so it shows how profitable your products or services are before overheads. Net profit takes that gross profit and subtracts all your other operating expenses and taxes, so it shows what the business truly keeps.
Put simply, gross profit measures the profit on what you sell, while net profit measures the profit of the whole business. You can dig deeper into the difference with our guide to calculating gross profit.
Net profit and net profit margin sound alike, but they measure your earnings in different ways. Understanding both gives you a fuller picture.
Net profit vs net profit margin
Net profit is a dollar figure: the actual amount left after all expenses and taxes. Net profit margin takes that figure and expresses it as a percentage of your revenue, so you can see how much of every dollar you keep.
The margin makes it easier to compare performance across periods or against other businesses. Learn how to work it out in our guide to calculating net profit margin.
Net profit is more than an accounting figure; it shapes how you run and grow your business. Here's why it deserves your attention.
Why net profit matters
Net profit is the bottom line, the clearest measure of whether your business is making money after everything's paid. It tells you if your pricing, costs, and sales are working together.
It also informs your decisions, from hiring to expansion, and it's the first number lenders and investors look at when they weigh up your business. A healthy net profit gives you room to reinvest and the confidence to plan ahead.
If your net profit is thinner than you'd like, there are practical ways to lift it. Small changes across your costs and pricing can add up.
How to improve your net profit
You can improve your net profit by earning more, spending less, or both. Try these approaches to strengthen your bottom line:
- reduce overheads by reviewing rent, subscriptions, and other fixed costs
- review your pricing to make sure it reflects the value you offer
- manage inventory and COGS so you're not tying up cash or overpaying suppliers
- cut waste in day-to-day admin by automating repetitive tasks
Keeping an eye on your net profit gets far easier when your numbers live in one place and update in real time.
Track your net profit with Xero
When your income and expenses flow into one place, your net profit is always up to date, so you can make confident decisions without wading through spreadsheets. Xero brings your finances together and gives you clear reports that show your bottom line at a glance.
See how much easier it is to stay on top of your profit, and get one month free.
Here are some frequently asked questions about net profit to clear up the most common points of confusion.
FAQs on net profit
How do I calculate net profit or net income for my business?
Subtract all your expenses, including COGS, operating costs, interest, and tax, from your total income. Net profit and net income are the same figure, so the calculation is identical either way.
What's the difference between gross profit and net profit?
Gross profit is your revenue minus the cost of goods sold, before overheads. Net profit is your gross profit minus all other operating expenses and taxes.
Is net profit the same as net income?
Yes, net profit and net income refer to the same amount: what's left after every expense is paid. Both are often called the bottom line.
Where do I find net profit on my financial statements?
Net profit sits at the very bottom of your profit and loss statement, which is why it's called the bottom line. It's the final figure once all income and expenses are accounted for.
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.