Net profit
What net profit is, how to calculate it and what a healthy margin looks like for South African businesses.
Published Wednesday 12 August 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 amount left after subtracting all expenses from revenue, including operating costs, interest and tax, showing your true bottom line.
- Calculating net profit regularly helps you understand whether your business is genuinely profitable or just turning over money.
- A healthy net profit margin varies by industry, and South African businesses often operate on thinner margins than global averages.
- You can improve net profit by cutting unnecessary costs, reviewing your pricing strategy and running your operations more efficiently.
What is net profit?
Net profit is the amount of money your business keeps after subtracting all expenses from total revenue. It's also known as net income, net earnings or the bottom line.
Unlike gross profit, which only accounts for the direct cost of goods sold, net profit factors in every expense your business incurs. This figure appears at the bottom of your profit and loss statement and represents what you've actually earned.
What's included in net profit?
Net profit accounts for every cost involved in running your business. The following expenses are deducted from revenue to calculate it:
- cost of goods sold
- operating expenses such as rent, salaries, utilities and marketing
- interest on loans and credit
- tax
- depreciation and amortisation
Net profit vs gross profit
These two figures measure profitability at different stages of your operations. Here's how they compare:
- Gross profit is revenue minus cost of goods sold, showing how efficiently you produce or source what you sell.
- Net profit goes further, subtracting operating expenses, interest, tax and depreciation from gross profit.
- Gross profit can be healthy while net profit is low if overheads, interest or taxes are high.
- Net profit gives the complete picture of your financial performance.
How to calculate net profit
You can calculate net profit using a straightforward formula. The basic version is:
Net profit = total revenue − total expenses
For a more detailed calculation, use:
Net profit = gross profit − operating expenses − taxes − interest − depreciation
Follow these steps to work it out:
- Add up all revenue from sales and other income.
- Subtract the cost of goods sold to get gross profit.
- Subtract operating expenses such as rent, salaries and utilities.
- Subtract interest payments on any business debt.
- Subtract tax owed on your profit.
- Subtract depreciation and amortisation to arrive at net profit.
Net profit example
Consider a small South African retail business with the following figures for the financial year:
- Total revenue: R1,200,000
- Cost of goods sold: R480,000
- Operating expenses: R380,000
- Interest: R20,000
- Tax: R60,000
- Depreciation: R10,000
First, calculate gross profit: R1,200,000 − R480,000 = R720,000.
Then subtract remaining expenses: R720,000 − R380,000 − R20,000 − R60,000 − R10,000 = R250,000.
The business has a net profit of R250,000.
Why does net profit matter?
Net profit is the clearest signal of whether your business is genuinely profitable. Revenue can look impressive, but if expenses consume most of it, you're not building wealth. Net profit shows what's left for you after everything is paid.
Lenders and investors look closely at net profit when assessing your business. A consistent net profit demonstrates that your business can cover its obligations and generate returns, making it easier to secure funding or attract partners.
A healthy net profit also gives you room to reinvest in growth, build reserves for slower periods or pay yourself a fair salary. Without it, your options narrow.
What is a good net profit margin?
Net profit margin expresses your net profit as a percentage of revenue, making it easier to compare performance across periods or against other businesses. The formula is:
Net profit margin = (net profit / total revenue) × 100
Using the example above: (R250,000 / R1,200,000) × 100 = 20.8%.
What counts as "good" depends on your industry. According to margins by sector data from NYU Stern, service businesses tend to run higher margins while retail and hospitality operate on tighter ones. These figures reflect US publicly traded company averages, so local small-business margins may differ.
In South Africa, margins can be particularly thin. According to Statistics South Africa's Annual Financial Statistics, as analysed by the Bureau of Market Research, the average after-tax profit margin across all South African businesses was about 1.3% in 2024.
Rather than chasing a single benchmark, track your own margin over time. Consistent improvement matters more than hitting an arbitrary target. Learn more in the net profit margin glossary entry.
Net profit vs other profit metrics
Net profit sits at the bottom of a hierarchy of profit measures, each useful for different purposes.
Operating profit is revenue minus operating expenses, calculated before interest and tax. It shows how well your core operations perform, separate from financing decisions and tax obligations.
EBITDA (earnings before interest, taxes, depreciation and amortisation) strips out non-cash charges and financing costs, often used to compare businesses with different capital structures. Net profit, however, reflects your actual earnings after every expense has been accounted for.
How to improve your net profit
Improving net profit requires attention to both revenue and costs. Small, consistent changes add up over time:
- review your pricing to ensure it covers costs and reflects the value you deliver
- reduce operating expenses by renegotiating supplier contracts or working through practical cost saving ideas for your business
- manage inventory carefully to avoid tying up cash in slow-moving stock
- automate repetitive tasks with accounting software to save time and reduce errors
- monitor your profit and loss statement monthly to catch problems before they grow
This isn't a one-off fix. Building consistent habits around cost control and performance monitoring is what keeps margins healthy over time.
Simplify your profit tracking with Xero
Xero's cloud accounting software automates bank reconciliation, tracks expenses in real time and generates profit and loss reports whenever you need them. You can see exactly where your money goes without spending hours on manual data entry.
Ready to take control of your business finances? You can get one month free and see how Xero simplifies profit tracking from day one.
FAQs on net profit
Here are answers to common questions about net profit and how it applies to South African businesses.
What is the difference between net profit and net income?
Net profit and net income mean the same thing. Both refer to what remains after all expenses have been subtracted from revenue.
Do you pay tax on net profit in South Africa?
Companies pay corporate income tax at a standard rate of 27% on taxable profit, which closely relates to net profit, according to the SARS Budget 2026 FAQ. Qualifying small business corporations pay a reduced sliding scale. Sole proprietors pay income tax at personal rates and typically make provisional tax payments to SARS throughout the year.
Why might a business have high gross profit but low net profit?
High overheads, operating costs, interest payments or a large tax bill can erode gross profit. A business can sell profitably but still struggle if its other expenses are too high.
What is operating profit?
Operating profit is revenue minus operating expenses, calculated before interest and tax. It measures the profitability of your core business activities.
How often should you review your net profit?
Monthly reviews give you the clearest view of trends and let you respond to problems before they grow.
What does a negative net profit mean?
A negative net profit is a net loss, meaning expenses exceeded revenue. It's a signal to review your costs and revenue streams carefully.
Related terms
Learn more about net profit
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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.