Net profit (calculation)
Learn how to calculate net profit, and see why it matters for your South African small business.
Published Wednesday 12 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 from total revenue, showing what your business actually earns.
- The formula is net profit = total revenue − total expenses, or net profit = gross profit − operating expenses − interest − tax.
- Net profit margin measures profitability as a percentage and helps you compare performance across periods or against industry benchmarks.
- Tracking net profit regularly gives you a clear picture of financial health and helps inform pricing, cost control, and growth decisions.
What is net profit?
Net profit is the money your business keeps after paying all costs, including cost of sales, operating expenses, interest and tax. It appears at the bottom of your profit and loss statement, which is why it's often called the "bottom line".
The net profit formula
You can express net profit in two ways, depending on your starting point.
Net profit = total revenue − total expenses
Net profit = gross profit − operating expenses − interest − tax
Both formulas produce the same result. The second version is useful when you already have your gross profit figure from your accounting records.
How to calculate net profit
Follow these steps to work out your net profit for a given period.
- Add up all revenue earned during the period.
- Calculate cost of sales (the direct costs of producing goods or delivering services).
- Subtract cost of sales from revenue to get gross profit.
- Total your operating expenses, such as rent, salaries, utilities and marketing.
- Add any interest paid on loans or credit facilities.
- Determine your tax expense for the period.
- Subtract operating expenses, interest and tax from gross profit to arrive at net profit.
Net profit calculation example
Here's a worked example using rand figures for a South African small business.
Revenue: R500,000
Cost of sales: R280,000
Gross profit: R500,000 − R280,000 = R220,000
Operating expenses: R120,000
Interest: R10,000
Tax: R25,000
Net profit: R220,000 − R120,000 − R10,000 − R25,000 = R65,000
This business earned R65,000 in net profit for the period, representing what remains after covering every cost.
Gross profit vs operating profit vs net profit
These profit measures each tell you something different about your business performance, and together they form part of your profitability ratios.
- Gross profit is revenue minus cost of sales, showing how much you earn from core production or service delivery before other costs.
- Operating profit is gross profit minus operating expenses, revealing earnings from day-to-day operations before interest and tax.
- Net profit is operating profit minus interest and tax, indicating what remains for the business after all obligations.
What is net profit margin, and what is a good one?
Net profit margin expresses your net profit as a percentage of revenue, making it easier to compare profitability across periods or businesses of different sizes. You calculate it as follows: net profit ÷ revenue × 100.
Using the example above: R65,000 ÷ R500,000 × 100 = 13%. You can check your own figure with our net profit margin calculator.
As a general rule of thumb, a net profit margin around 5% is considered low, 10% is average, and 20% is high, according to Corporate Finance Institute. However, benchmarks vary by industry, and South African small-business margins may differ based on local market conditions.
How to improve your net profit
Several practical tactics can help you increase the amount left over after expenses.
- Review your pricing to ensure it covers costs and reflects the value you deliver.
- Reduce cost of sales by negotiating with suppliers or finding more efficient production methods.
- Cut overheads by reviewing subscriptions, utilities and other recurring expenses.
- Drop unprofitable products or services that consume resources without contributing to the bottom line.
Limitations of net profit
Net profit is a useful measure, but it doesn't tell the whole story. It's not the same as cash flow because accrual accounting records revenue and expenses when they're earned or incurred, not when cash changes hands. A profitable business can still run short of cash if customers pay slowly or large expenses come due at once.
One-off items, such as selling an asset or receiving an insurance payout, can inflate net profit for a single period. Accountants also adjust for non-cash expenses like depreciation, which reduces reported profit without affecting the bank balance. Read up on managing your finances and cash flow to see net profit in a fuller picture.
Track your net profit with Xero
Keeping an eye on net profit helps you make confident decisions about pricing, costs and growth. Xero's accounting software automatically pulls your revenue and expenses into real-time reports, so you can see your bottom line whenever you need it. Sign up today and get one month free.
FAQs on net profit
Here are answers to common questions about net profit.
Is net profit the same as net income?
Yes. The two terms are used interchangeably in most contexts and both refer to revenue minus all expenses.
Does net profit include tax?
Net profit is calculated after deducting tax, so it reflects earnings once your tax obligation has been accounted for.
What is the difference between gross profit and net profit?
Gross profit is revenue minus cost of sales, while net profit goes further by subtracting operating expenses, interest and tax from gross profit.
Can net profit be negative?
Yes. A negative net profit means your business made a loss for the period because total expenses exceeded total revenue.
Do you pay tax on gross or net profit in South Africa?
South African companies pay corporate income tax on taxable income, which is derived from net profit after applying tax adjustments, not on gross profit.
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.