{"id":264037,"date":"2023-06-27T16:00:22","date_gmt":"2023-06-27T04:00:22","guid":{"rendered":"https:\/\/www.reckon.com\/au\/?page_id=264037"},"modified":"2026-08-21T15:36:03","modified_gmt":"2026-08-21T03:36:03","slug":"net-profit","status":"publish","type":"glo","link":"https:\/\/www.reckon.com\/au\/glossary\/net-profit\/","title":{"rendered":"What is net profit?"},"content":{"rendered":"

[et_pb_section fb_built=”1″ custom_padding_last_edited=”off|desktop” _builder_version=”4.27.2″ custom_margin=”0px||0px||false|false” custom_padding=”0px||0px||false|false” custom_padding_phone=”0px||||false|false” da_disable_devices=”off|off|off” locked=”off” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on”][et_pb_row column_structure=”1_3,2_3″ _builder_version=”4.27.2″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” width=”100%” custom_margin=”0px||0px||false|false” custom_padding=”0px||0px||false|false” global_colors_info=”{}”][et_pb_column type=”1_3″ module_class=”table-contents” _builder_version=”4.23″ background_color=”#f3f2f6″ custom_padding=”25px||25px||true|false” sticky_position=”top” sticky_limit_bottom=”section” sticky_position_tablet=”top” sticky_position_phone=”none” sticky_position_last_edited=”on|desktop” border_radii=”on|24px|24px|24px|24px” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text _builder_version=”4.23″ text_font=”||||||||” global_colors_info=”{}” background__hover_enabled=”on|desktop”][\/et_pb_text][\/et_pb_column][et_pb_column type=”2_3″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text admin_label=”Intro” _builder_version=”4.27.7″ header_2_font_size=”32px” header_2_font_size_tablet=”30px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet” global_colors_info=”{}”]<\/p>\n

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.<\/p>\n

[\/et_pb_text][et_pb_image src=”https:\/\/www.reckon.com\/au\/wp-content\/uploads\/2023\/06\/Net-profit-meaning-icon-2.png” alt=”Net profit is the earnings of a business after all expenses, taxes, and costs are subtracted from total revenue” title_text=”Net Profit Meaning Icon 2″ align=”center” admin_label=”Image” _builder_version=”4.27.7″ _module_preset=”default” global_colors_info=”{}”][\/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.27.7″ header_2_font_size=”32px” header_2_font_size_tablet=”30px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet” global_colors_info=”{}”]<\/p>\n

Net profit is also called the \u2018bottom line\u2019 because it sits at the bottom of the income statement, or profit and loss statement<\/a>. It shows a company’s financial performance, overall profitability, and true earning power.<\/p>\n

How do you calculate net profit?<\/h2>\n

All you need to do is subtract your company\u2019s total expenses from your company\u2019s total revenue.<\/p>\n

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:<\/p>\n

Net profit = Total revenue \u2013 Total expenses<\/em><\/strong><\/p>\n

Put simply, revenue minus total expenses is the equation \u2013 all the costs come out of the top line.<\/p>\n

Starting from total sales revenue, subtract the costs incurred on goods sold and raw materials, then total operating expenses<\/a>, interest expenses, and taxes.<\/p>\n

Gathering all the necessary figures can be time-consuming without proper records, so use accounting software<\/a> for the most accurate bookkeeping.<\/p>\n

What is the net profit margin formula?<\/h2>\n

Net profit can be expressed as a figure or as a net profit margin \u2013 the net profit as a percentage of a company\u2019s revenue. The formula looks like this:<\/p>\n

Net profit margin = Net profit \/ Total revenue \u00d7 100<\/em><\/strong><\/p>\n

Margins are useful for comparing year-on-year results and a company\u2019s 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.<\/p>\n

Context matters too. A supermarket with a 2% margin might look weak, but that actually lines up with the supermarket industry average of 2\u20133%. Net profit margin is a better performance indicator than the raw figure alone.<\/p>\n

What is the difference between gross profit, operating profit, and net profit?<\/h2>\n

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.<\/p>\n

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.<\/p>\n

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).<\/p>\n

Net profit is the remaining income after all expenses: total revenue minus cost of goods sold (COGS), operating expenses, taxes, interest, depreciation, and amortisation.<\/p>\n

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.<\/p>\n

What costs (like cost of goods sold) are included in net profit?<\/h2>\n

If you want to see the gap between gross profit and net profit, focus on two cost groups: COGS and operating expenses.<\/p>\n

Cost of goods sold<\/a> covers the direct costs of creating products, like raw materials.<\/p>\n

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.<\/p>\n

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.<\/p>\n

Net profit example<\/h2>\n

Here is an example of two companies’ net profit to make it clearer:<\/p>\n\n\n\n\n\n\n\n\n\n
\u00a0<\/th>\nCompany A<\/th>\nCompany B<\/th>\n<\/tr>\n
Revenue<\/td>\n$100M<\/td>\n$180M<\/td>\n<\/tr>\n
COGS\/raw materials<\/td>\n$35M<\/td>\n$70M<\/td>\n<\/tr>\n
Operating expenses<\/td>\n$10M<\/td>\n$18M<\/td>\n<\/tr>\n
Interest<\/td>\n$1M<\/td>\n$1.8M<\/td>\n<\/tr>\n
Taxes<\/td>\n$30M<\/td>\n$54M<\/td>\n<\/tr>\n
Net Profit<\/strong><\/td>\n$24M<\/td>\n$36.2M<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

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%.<\/p>\n

Higher margins mean better cost control and more dollars kept from every sale.<\/p>\n

Why is net profit important?<\/h2>\n

Net profit is the bottom line and is treated as the most important outcome for a business. Here are a few other reasons:<\/p>\n