Net profit
Learn what net profit is, how to calculate it, and how it differs from gross profit and net income.
Published Thursday 23 July 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 the money your business keeps after all expenses, interest and tax are paid. It sits on the last line of your profit and loss statement.
- You work it out by taking gross profit and subtracting operating expenses, interest and tax, or by taking total revenue and subtracting every expense.
- Net profit, net income, net earnings and the bottom line all refer to the same figure, so you can treat them as one number.
- Net profit margin turns that figure into a percentage of revenue, which lets you compare your performance with businesses of any size.
Net profit is one of the first numbers owners, lenders and investors look at, so it helps to know exactly what it measures. Here's a plain definition before we get into the detail.
What is net profit?
Net profit is the money you get to keep after all expenses and taxes are paid. It's what's left from your revenue once you've covered the cost of goods sold, operating expenses, interest and tax.
You'll often see net profit called the bottom line. That's because it appears as the last line of your profit and loss statement, after every expense has been taken out. It's also known as net income and net earnings, and all of these terms point to the same figure.
Once you've worked out your net profit, you can pay it out to the business owners or reinvest it to help the business grow.
A simple formula sits behind that definition, and it works in two equivalent ways. Here's how each version is laid out.
The net profit formula
The most common way to write it starts from gross profit:
Net profit = gross profit − operating expenses − interest − tax
You can also reach the same figure by starting from the top of your profit and loss statement:
Net profit = total revenue − all expenses (including interest and tax)
In both versions, "all expenses" covers the same costs. Those are:
- cost of goods sold, the direct costs of making or buying what you sell
- operating expenses, such as rent, wages, marketing and utilities
- interest on any business borrowing
- tax owed on your profit
Working through a real example makes the formula easier to apply to your own numbers. Here's how it looks for a small business over a year.
How to calculate net profit
To find your net profit, start with total revenue and subtract each type of cost in turn. Taking them one step at a time also shows you your gross profit and operating profit along the way.
Worked example in NZD
Say your business earns $200,000 in revenue over the year. Your costs are $80,000 in cost of goods sold, $70,000 in operating expenses, $5,000 in interest and $12,000 in tax.
- Start with total revenue of $200,000.
- Subtract cost of goods sold of $80,000 to get gross profit of $120,000.
- Subtract operating expenses of $70,000 to get operating profit of $50,000.
- Subtract interest of $5,000, which leaves $45,000.
- Subtract tax of $12,000 to get net profit of $33,000.
So this business keeps $33,000 as net profit. That's the figure the owner can reinvest or take out of the business.
Net profit, gross profit and operating profit are all measures of profit, but each one strips out different costs. Knowing where they differ stops you comparing the wrong numbers.
Net profit vs gross profit vs operating profit
Think of these three as a hierarchy, with each step subtracting more costs than the one before. The sections below explain each measure in turn.
Gross profit
Gross profit is your revenue minus the cost of goods sold, so it shows how much you make before overheads. You can read more in our guide to gross profit.
Operating profit
Operating profit takes gross profit and subtracts your operating expenses, such as rent and wages. It shows how profitable your core operations are, but it leaves out interest and tax.
Net profit
Net profit goes one step further and subtracts interest and tax as well. It's the final figure that tells you what the business actually keeps.
You might see net profit and net income used side by side and wonder if they mean the same thing. In everyday business use, they do.
Net profit vs net income: are they the same?
Net profit and net income are two names for the same figure: what's left after every expense, including interest and tax, is paid. You'll also hear it called net earnings or the bottom line.
Because they're interchangeable, you don't need to treat a report that says "net income" any differently from one that says "net profit". Just check that the same costs have been taken out so you're comparing like with like.
Net profit tells you the dollar amount you keep, while net profit margin turns that into a percentage. The margin is what lets you compare businesses fairly.
What is net profit margin?
Net profit margin is your net profit divided by revenue, multiplied by 100 to give a percentage. Using the earlier example, $33,000 ÷ $200,000 × 100 gives a net profit margin of 16.5%.
The margin is useful because it accounts for size. A large business and a small one can report very different net profits in dollars. Their margins show you which one keeps more of every dollar it earns. You can learn more in our guide to net profit margin.
Net profit is a headline number for anyone judging how a business is doing. Several groups rely on it for different reasons.
Why net profit matters
For you as an owner, net profit shows whether the business is genuinely making money after every cost. That guides decisions about reinvesting, paying yourself or cutting expenses. It's a clearer signal of health than revenue alone.
Lenders look at net profit to judge whether you can afford repayments, and investors use it to gauge returns. It's also the figure that anchors your profit and loss statement, so it feeds directly into the reports these groups review.
If your net profit is thinner than you'd like, there are practical levers you can pull. Most of them come down to earning more or spending less on each sale.
How to improve your net profit
Small changes across pricing and costs can add up to a healthier bottom line. Here are some tactics to consider:
- Review your pricing to make sure it reflects the value you offer
- Reduce overheads such as subscriptions, rent or utilities where you can
- Manage inventory so you're not tying up cash in stock that doesn't sell
- Cut direct costs by negotiating with suppliers or reducing waste
- Drop or rework products and services that lose money
You can dig deeper into these ideas in our guide on how to measure profitability.
Net profit is powerful, but it doesn't tell you everything about your business. It helps to know what the number leaves out.
Limitations of net profit
Net profit can be skewed by one-off items, such as selling an asset or a large unexpected bill. These make a single period look better or worse than normal. Net profit also says nothing about timing, so a healthy figure doesn't guarantee cash in the bank when bills fall due.
Chasing a higher figure by over-cutting costs can backfire too, if you trim spending that drives future growth. To see the fuller picture, read net profit alongside your other financial reports.
Tracking net profit by hand takes time you'd rather spend running your business. Accounting software keeps the figure up to date for you.
See your net profit clearly with Xero
Xero brings your income and expenses together in one place. It updates your profit and loss statement as you work, so your net profit is always current. That means you can make confident decisions without waiting for the books to be reconciled at month end.
Try it for yourself and see your numbers come to life: get one month free.
Here are some frequently asked questions about net profit to round out the detail above.
FAQs on net profit
What is net profit in simple terms?
Net profit is the money your business keeps once every cost has been paid. If you emptied out all your expenses, interest and tax from your revenue, net profit is what's left in the tin.
How do you calculate net profit?
Take your total revenue and subtract all your expenses, including cost of goods sold, operating expenses, interest and tax. The quickest check is to look at the last line of your profit and loss statement.
Is net profit the same as net income?
Yes, net profit and net income are two names for the same figure. Net earnings and the bottom line describe it too.
What's the difference between net profit and gross profit?
Gross profit only subtracts the cost of goods sold from revenue, while net profit subtracts every cost, including operating expenses, interest and tax. Net profit is always the smaller of the two.
What is a good net profit margin?
A good margin depends heavily on your industry, since a supermarket and a software company sit at very different levels. Compare your margin with similar businesses and track whether your own is trending up over time.
Related terms
Learn more about net profit
Handy resources
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Margin calculator
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Financial reporting
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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.