How to calculate net profit
Learn how to calculate net profit, work through a peso example, and see what a healthy net profit margin looks like.
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 remaining after subtracting all expenses, including cost of goods sold, operating expenses, interest, and taxes, from your total revenue.
- Tracking net profit helps you understand whether your business is genuinely making money and reveals trends that signal pricing problems or rising costs.
- Lenders, investors, and potential buyers look at net profit to assess your financial health and decide whether to work with your business.
- Improving net profit usually comes down to reducing unnecessary expenses, adjusting your pricing, or increasing sales while protecting your margins.
What is net profit?
Net profit is the amount of money left over after you subtract all expenses from your total revenue. You might also see it called net income, net earnings, or the bottom line, because it sits on the last line of your profit and loss statement. According to the Corporate Finance Institute, net profit is calculated by deducting all company expenses from total revenue.
Unlike gross profit, which only accounts for the direct cost of producing goods or services, net profit includes every expense your business incurs: cost of goods sold, operating expenses like rent and utilities, interest payments, and taxes. Revenue is the total money coming in, but net profit is what you actually get to keep.
A positive net profit means your revenue exceeds your total costs. A negative net profit (a net loss) signals you are spending more than you are earning, which may call for changes to your pricing or cost base.
Why net profit matters
Net profit shows whether your business is genuinely making money after all costs are accounted for. Revenue alone does not tell the full story, because a business can have strong sales and still struggle if expenses eat into that revenue.
Understanding your net profit helps with:
- Assessing financial health: a healthy net profit signals that you manage expenses well and generate real returns
- Securing funding: lenders and investors review net profit to decide whether you can repay debts or provide returns
- Business planning: net profit affects your ability to reinvest in growth, pay down debt, or build resilience during slower periods
- Spotting trends: tracking net profit over time reveals rising costs or pricing issues before they become serious problems
When you apply for a business loan or seek investment, your net profit demonstrates the viability of your operations. A growing net profit confirms that your business strategy is working.
How to calculate net profit
Calculating net profit uses figures from your profit and loss statement. Follow these steps to work out your net profit for a period.
1. Gather your revenue figures
Start with your total revenue for the period. This includes all income from sales of products or services before any deductions.
2. Subtract cost of goods sold
Deduct your cost of goods sold (COGS), which covers the direct costs of producing or delivering your products and services. This gives you your gross profit.
3. Subtract operating expenses
Deduct operating expenses such as rent, utilities, wages, marketing, and administrative costs, along with depreciation. What remains is your operating profit.
4. Subtract interest and taxes
Finally, subtract interest payments on any loans and your income tax. The result is your net profit.
The formula looks like this:
Net profit = Revenue − cost of goods sold − operating expenses − interest − taxes
For example, imagine your business records ₱500,000 in revenue, ₱200,000 in COGS, ₱150,000 in operating expenses, ₱10,000 in interest, and ₱28,000 in taxes. Your net profit would be ₱112,000. These figures are illustrative and simply show how the formula works step by step.
Net profit vs gross profit and operating profit
Gross profit, operating profit, and net profit each measure profitability at a different stage of your business.
Gross profit is your revenue minus only the cost of goods sold. It shows whether you are selling goods and services for more than they cost you to produce. Operating profit goes one step further, subtracting operating expenses like rent, wages, and utilities, so it reflects how well your core operations perform before interest and taxes.
Net profit takes it all the way down by subtracting every remaining expense, including interest and taxes. A business can have healthy gross profit but weak net profit if operating costs, interest, or taxes are high. Watching all three figures helps you pinpoint whether a profit problem sits in production costs, overheads, or financing.
What is a good net profit margin?
Net profit margin turns your net profit into a percentage, so you can compare performance over time or against other businesses. The formula is net profit divided by revenue, multiplied by 100. Using the example above, ₱112,000 divided by ₱500,000, multiplied by 100, gives a net profit margin of 22.4%.
A good net profit margin depends heavily on your industry. As a general guide, Brex describes a net profit margin of around 10% as healthy, with roughly 5% considered low and 20% or more high, though some sectors run sustainably on much thinner margins while others expect more. These are broad international benchmarks rather than official Philippine figures, so the most useful comparison is against similar businesses in your own sector. To see where the numbers come from, it helps to learn how to measure profitability across your business.
Tips for improving net profit
Increasing your net profit means working on both revenue and expenses. Consider these approaches:
- Review operating expenses regularly and cut costs that add little value
- Negotiate better terms with suppliers to reduce your cost of goods sold
- Set pricing based on the value you deliver, not just on competitor prices
- Increase sales through targeted marketing that protects your margins
- Reduce waste in production to lower your direct costs
- Follow up on accounts receivable to speed up collections and support cash flow
Small improvements across several areas often add up to a meaningful increase in net profit. Track your progress monthly so you can see what is working.
Track net profit with Xero
Keeping track of net profit does not have to be complicated. With Xero accounting software, your profit and loss statement updates automatically as you record transactions, so you can view net profit for any period and compare performance over time. Run your financial reports whenever you need them, and you can get one month free to see how Xero simplifies financial tracking for your business.
FAQs on net profit
Here are answers to some common questions about net profit.
What is the difference between net profit and gross profit?
Gross profit is revenue minus the cost of goods sold, while net profit subtracts every other expense too, including operating costs, interest, and taxes. Gross profit shows production efficiency; net profit shows overall profitability.
Can net profit be negative?
Yes, a negative net profit (called a net loss) happens when your expenses exceed your revenue. Occasional losses are normal, but consistent losses point to a need to adjust pricing, reduce costs, or rethink your business model.
Is net profit the same as cash?
No, net profit and cash are different. Net profit is an accrual figure that includes non-cash items like depreciation, while cash tracks the actual money moving in and out of your business during a period.
Do you pay tax on net profit in the Philippines?
Net profit, as net taxable income, is subject to corporate income tax, generally 25%, or 20% for a domestic corporation with net taxable income of ₱5 million or less and total assets of ₱100 million or less, paid to the Bureau of Internal Revenue. Sole proprietors are taxed instead at graduated personal income tax rates or an optional 8% rate.
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.