How to calculate net profit

Published Monday 17 August 2026

Table of contents

• What is net profit?
• What is the net profit formula?
• How to calculate net profit
• What counts as expenses?
• Net profit calculation example
• What is net profit margin?
• Net profit vs gross profit vs operating profit
• Why net profit matters
• How to improve your net profit
• Track your net profit with Xero
• FAQs on net profit
• Related terms
• Learn more about net profit

Key takeaways

• Net profit is calculated using the formula: total revenue minus total expenses, or gross profit minus operating expenses, interest and taxes.
• Net profit is your bottom line, the amount left after deducting all expenses, interest and taxes from revenue.
• Net profit margin expresses net profit as a percentage of revenue, helping you compare performance over time or against other businesses.
• Net profit differs from cash flow because it includes non-cash items like depreciation and may not reflect the actual cash in your bank account.

What is net profit?

Net profit is the amount of money your business keeps after subtracting all expenses, interest and taxes from total revenue. It represents gross profit minus operating expenses, interest and taxes.

Net profit appears at the bottom of your profit and loss statement, which is why it's often called the "bottom line". This figure shows whether your business is truly profitable. Once calculated, net profit can be reinvested back into the business to fund growth, or paid out to owners as a return on their investment.

What is the net profit formula?

The net profit formula is straightforward. You can express it in two ways:

Net profit = total revenue − total expenses

Or, broken down further:

Net profit = gross profit − operating expenses − interest − taxes

Total revenue is all the income your business earns from selling goods or services. Total expenses include your cost of goods sold (COGS), operating expenses such as rent and wages, interest payments on loans, and taxes. By subtracting every expense from your revenue, you arrive at your net profit.

How to calculate net profit

Calculating net profit involves a few clear steps. Follow this process to work out your net profit for any given period.

1. Add up your total revenue from all sales of goods and services.
2. Subtract your cost of goods sold (COGS) from total revenue. The result is your gross profit.
3. Subtract your operating expenses (rent, wages, utilities, marketing) from gross profit.
4. Subtract any interest payments on business loans or credit.
5. Subtract taxes owed for the period.
6. The remaining figure is your net profit.

Your accountant may also adjust for depreciation of assets, which reduces net profit without affecting cash on hand.

What counts as expenses?

Several categories of expenses reduce your revenue to arrive at net profit. Understanding each category helps you track where your money goes.

• Cost of goods sold (COGS): direct costs to produce your products or deliver your services, such as raw materials and manufacturing labour
• Operating expenses: day-to-day costs of running your business, including rent, utilities, wages, insurance and marketing
• Interest: payments on business loans, credit lines or other borrowed funds
• Taxes: corporate income tax and other taxes owed to the government

Net profit calculation example

Here is a worked example using Singapore dollars. Imagine a small business that sells handmade products.

The business earns S$20,000 in total revenue from sales. The cost of goods sold (materials and production labour) is S$8,000. This gives a gross profit of S$12,000 (S$20,000 − S$8,000).

Operating expenses for rent, wages and utilities total S$3,000. After subtracting these, the business has S$9,000 remaining (S$12,000 − S$3,000).

The business owes S$4,000 in taxes for the period. Subtracting taxes leaves a net profit of S$5,000 (S$9,000 − S$4,000).

This S$5,000 is the true profit the business keeps after all costs, and can be reinvested or taken as owner drawings.

What is net profit margin?

Net profit margin expresses your net profit as a percentage of total revenue. The formula is: (net profit ÷ revenue) × 100.

This percentage helps you compare your profitability over different periods or against other businesses in your industry. A "good" net profit margin varies by industry, but as a general rule of thumb, 5% is low, 10% is healthy and 20% is high.

Net profit vs gross profit vs operating profit

These three profit measures each tell you something different about your business. Understanding the distinction helps you analyse performance at each stage.

• Gross profit: revenue minus cost of goods sold (COGS), showing the profit from core production before other expenses
• Operating profit: gross profit minus operating expenses, revealing profit from regular business operations before interest and taxes
• Net profit: operating profit minus interest and taxes, the final bottom line showing total profitability

Why net profit matters

Net profit is the ultimate measure of your business's financial health. It shows whether your business is truly profitable after accounting for every cost.

Business owners use net profit to decide how much to reinvest in growth or draw as personal income. Lenders and investors also look at net profit to assess whether a business is financially stable and worth supporting. By tracking net profit over time, you can spot trends and make informed decisions about measuring profitability and improving your operations.

How to improve your net profit

Improving net profit requires either increasing revenue or reducing expenses. Here are practical steps to boost your bottom line.

• Review your pricing strategy to ensure you're charging enough to cover costs and earn a healthy margin
• Reduce operating overheads by negotiating better rates on rent, utilities or services
• Lower your cost of goods sold by sourcing materials from more competitive suppliers
• Cut waste and discontinue unprofitable product lines or services

Track your net profit with Xero

Xero gives you real-time financial reports so you can see your net profit whenever you need to. The profit and loss report updates automatically as you record transactions, giving you an accurate view of your bottom line.

You can compare net profit across different periods to spot trends and make better decisions. Ready to take control of your finances? Get one month free and see how Xero helps you stay on top of your numbers.

FAQs on net profit

Here are answers to common questions about calculating and understanding net profit.

Is net profit calculated before or after tax?

Net profit is calculated after tax. It represents the final amount remaining once all expenses, interest and taxes have been deducted from revenue.

What is a good net profit margin?

A good net profit margin depends heavily on your industry. Rather than aiming for a single target, compare your margin to businesses of a similar size and sector to judge how you're performing.

What is the difference between gross profit and net profit?

Gross profit is revenue minus cost of goods sold, while net profit is gross profit minus operating expenses, interest and taxes. Gross profit measures production efficiency, whereas net profit shows overall profitability.

Why might a business have high gross profit but low net profit?

High operating expenses, significant interest payments or a large tax bill can erode gross profit. A business may produce goods efficiently yet still struggle with high overheads or debt costs.

Is net profit the same as taxable income?

Not always. Taxable income is calculated according to tax rules, which may differ from accounting standards. Certain deductions or exemptions can create a gap between net profit and taxable income.

Related terms

• Gross profit vs net profit
• Profit and loss statement
• Net income (calculation)
• Operating expense
• Cost of goods sold (COGS)

Learn more about net profit

• Profitability ratios: definition, types and formulas
• Profit margin: what it is and how to calculate it
• Gross profit margin formula
• What is revenue in accounting?