Net profit is the money left after all costs have been paid. Net profit, net income, and net earnings can be used interchangeably and mean the same thing.
Net profit is also called the ‘bottom line’ because it sits at the bottom of the income statement, or profit and loss statement. It shows a company’s financial performance, overall profitability, and true earning power.
How do you calculate net profit?
All you need to do is subtract your company’s total expenses from your company’s total revenue.
Total revenue includes all income from sales, services, and any other sources. The net profit total revenue relationship is the basis of the whole calculation:
Net profit = Total revenue – Total expenses
Put simply, revenue minus total expenses is the equation – all the costs come out of the top line.
Starting from total sales revenue, subtract the costs incurred on goods sold and raw materials, then total operating expenses, interest expenses, and taxes.
Gathering all the necessary figures can be time-consuming without proper records, so use accounting software for the most accurate bookkeeping.
What is the net profit margin formula?
Net profit can be expressed as a figure or as a net profit margin – the net profit as a percentage of a company’s revenue. The formula looks like this:
Net profit margin = Net profit / Total revenue × 100
Margins are useful for comparing year-on-year results and a company’s profitability across industries. In terms of determining a company’s financial health, good net profit margins tend to sit between 10% and 20%, but it does vary quite widely by sector.
Context matters too. A supermarket with a 2% margin might look weak, but that actually lines up with the supermarket industry average of 2–3%. Net profit margin is a better performance indicator than the raw figure alone.
What is the difference between gross profit, operating profit, and net profit?
The biggest difference between gross profit and net profit lies in the scope of expenses considered. Each metric strips out a different layer of cost.
Gross profit is the amount a business retains after subtracting the cost of goods sold (COGS) from total revenue. It shows how much a company earns from its goods or services after direct costs and production costs.
Operating profit is calculated by taking operating expenses from gross profit. It shows how much the company earns from its main business functions (before interest and taxes).
Net profit is the remaining income after all expenses: total revenue minus cost of goods sold (COGS), operating expenses, taxes, interest, depreciation, and amortisation.
Comparing net profit and gross profit side by side shows the impact of overheads. For example, a company can have a high gross profit but a low net profit if its operating expenses are far too high.
What costs (like cost of goods sold) are included in net profit?
If you want to see the gap between gross profit and net profit, focus on two cost groups: COGS and operating expenses.
Cost of goods sold covers the direct costs of creating products, like raw materials.
Operating expenses (OpEx), on the other hand, include overhead costs like rent, wages, utilities, marketing and more. These are the indirect costs of running the business. Non-operating expenses (e.g., interest) and other costs, like taxes, are deducted last.
Some businesses start the calculation from net sales rather than gross revenue. Either way, you must capture every cost, including non-operating expenses, before you reach the bottom line.
Net profit example
Here is an example of two companies’ net profit to make it clearer:
| Company A | Company B | |
|---|---|---|
| Revenue | $100M | $180M |
| COGS/raw materials | $35M | $70M |
| Operating expenses | $10M | $18M |
| Interest | $1M | $1.8M |
| Taxes | $30M | $54M |
| Net Profit | $24M | $36.2M |
Company B has the greater net profit due to higher revenue. But using net margin as an indicator, Company A actually performs better at 24% versus Company B at 18.1%.
Higher margins mean better cost control and more dollars kept from every sale.
Why is net profit important?
Net profit is the bottom line and is treated as the most important outcome for a business. Here are a few other reasons:
- Investors and lenders use net profit to evaluate a company’s financial viability and a company’s ability to repay debts. A consistently positive net profit helps attract investors and secure loans.
- Net profit is, in most cases, the biggest driver of a company’s valuation during a sale or merger.
- Business owners use it to decide whether the business is making progress, as well as to allocate resources and investment.
- A sizeable net profit suggests the business is doing well and generating more money than it spends. A net loss means the opposite.
How can you improve net profit?
You can improve net profit by increasing revenue, reducing costs or both. Checking in on your pricing is usually the fastest tool. After all, optimising pricing strategies can lift your net earnings without extra sales volume.
Other approaches include improving operational speed, negotiating with suppliers to cut direct costs, eliminating unprofitable goods and services, better managing debt and tax obligations — all of which can improve your company’s net profit.
See related terms
What is gross profit?
Gross profit vs net profit
How to calculate gross profit margin
