Net profit is what a business has left from revenue after the expenses included in the calculation have been paid. The basic formula is net profit = total revenue − total expenses. The hard part is not the subtraction but deciding which expenses belong in the total, and that is where net profit and gross profit differ. This guide walks through the calculation, two worked examples, the terminology traps, and why net profit is not the same as cash in the bank.
How to calculate net profit
Use the same period for every number. A quarter’s revenue should be subtracted from that quarter’s expenses, not from a full year’s costs.
- Pick the period. For example, a fiscal year or a single quarter, as shown on the income statement you are working from.
- Total the revenue. For most businesses this is total sales or net sales, the figure shown at the top of the income statement.
- Total the expenses included in your definition. Typically this covers cost of goods sold (COGS), selling, general, and administrative (SG&A) expenses, interest and other non-operating expenses. Whether income tax expense is included depends on the convention discussed below.
- Subtract total expenses from total revenue. A positive result is net profit. A negative result is a net loss.
Net profit versus gross profit
Gross profit measures how much is left after paying the direct costs of making or delivering what was sold. Net profit measures what is left after every expense in the calculation, including overhead, financing costs and possibly tax. Gross profit therefore tells you about pricing and production efficiency; net profit tells you what the whole business kept.
| Measure | How it is calculated | Costs deducted | Position on the income statement | Form |
|---|---|---|---|---|
| Gross profit | Net sales − cost of goods sold | Direct costs of the goods or services sold | Subtotal directly below net sales | Amount |
| Net profit | Total revenue − total expenses included in the calculation | COGS plus SG&A, non-operating and interest expenses, and income tax where the convention includes it | Bottom line of the statement | Amount |
| Net profit margin | Net profit divided by total revenue, multiplied by 100 | Same as net profit | Calculated from the bottom line | Percentage of revenue |
Statements are not formatted identically. Some present additional subtotals, such as operating profit, between gross profit and net profit, so match each line to its label rather than to its position.
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Example 1: sole proprietorship with interest expense
AccountingCoach uses a sole proprietorship with the following figures:
| Line | Amount |
|---|---|
| Net sales | $200,000 |
| Less: cost of goods sold | ($140,000) |
| Gross profit | $60,000 |
| Less: SG&A expenses | ($45,000) |
| Less: interest expense | ($5,000) |
| Net profit | $10,000 |
Net profit margin on these figures is 5% ($10,000 ÷ $200,000). The example has no income tax line, which reflects the sole proprietorship structure rather than a general rule for all businesses.
Example 2: a simple revenue-minus-expenses calculation
CFI uses a short example with revenue of $500,000 and total expenses of $350,000. Net income is $500,000 − $350,000 = $150,000. That works out to a net profit margin of 30%. CFI does not break the $350,000 into categories, so this example illustrates the arithmetic rather than a complete statement layout.
Terminology: net income, net profit, and net earnings
Net income, net profit, and net earnings are used as closely related terms, and many readers see them used interchangeably. AccountingCoach cautions that “net profit” can have more than one meaning. For a regular corporation, it may mean the amount after income tax expense. Before you compare two numbers, confirm:
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- Which expenses are included, especially whether income tax is deducted.
- Which period the figures cover.
- Whether the number is an amount (dollars) or a percentage (margin).
Labels on a financial statement or a calculator may not reveal which convention was used, so state your convention when you share the result.
Net profit margin: a percentage, not an amount
Net profit tells you how much money remains. Net profit margin tells you how much of each revenue dollar remains, which makes it easier to compare a $200,000 business with a $5 million one. A margin only has meaning against businesses in the same industry, because typical margins vary widely between sectors. A 5% margin can be healthy in a low-margin trade and weak in a high-margin one.
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Net profit is not cash flow
Net income is an accounting measure and does not automatically equal the cash generated during the period. The calculation can include non-cash expenses such as depreciation and amortization, which reduce profit without any money leaving the bank in that period. Revenue may also be recorded before cash is collected, and expenses may be recorded before they are paid.
If your question is how much cash the business actually generated, read the cash flow statement rather than the net profit line.
Best Value
When net profit is negative
When the total expenses exceed revenue, the result is a loss rather than a profit. AccountingCoach states it this way: “If the net amount is a negative amount, it is referred to as a net loss.” The same subtraction is used in both cases, so the sign of the result is the only thing that changes.
Quick Recap
Quick checklist before you rely on a net profit figure
- Revenue and expenses cover the same period.
- COGS is deducted before SG&A and interest, so gross profit is calculated first.
- Income tax is included or excluded deliberately, and the convention is stated.
- A margin is compared only with businesses in the same industry.
- Cash questions are answered with the cash flow statement, not the profit line.
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