How to calculate net profit: Formula & examples

Understanding where your business stands financially can be key to its success. Your company’s net profit shows whether your business is truly making money—it reflects what remains after accounting for all your expenses, like payroll, rent, utilities, taxes and additional overhead costs, not just what you’re bringing in.

Tracking your net profit regularly can help you make more informed decisions and identify growth opportunities. Keep reading to learn about net profit, how to calculate it and strategies to increase it.

What you’ll learn:

• Net profit shows how profitable your business is over a given period of time, often called the company’s bottom line.
• Calculating net income involves subtracting all business expenses from total revenue.
• Net profit differs from gross profit in that gross profit shows how profitable your products or services are, while net profit reveals the overall profitability of your business.
• To improve net profit for your business, you can review your current pricing and expenses, appraise operational efficiencies and focus on strategies to improve customer retention. 

Net profit is the amount your business has left after all your expenses have been paid, showing whether your business is financially sustainable. Your company becomes profitable when its revenue is greater than the costs required to run the business. Net profit is shown at the end of your company’s income statement, which is why it’s often called the business’s “bottom line.”

Net profit is an important metric to understand for a few key reasons: 

• Reveals true financial health: Net profit shows whether your business is financially healthy and sustainable, rather than just breaking even.
• Leads to better decision-making: It helps you identify what’s working, what might be costing too much, and where you can cut costs or invest more. 
• Shows creditworthiness: Investors often look at net profit to judge your company’s performance. And lenders consider it to help determine your business’s ability to repay its debts.
• Allows for growth planning: Net profit helps you understand how much profit you have available to reinvest, hire more employees or expand the business. 

To calculate net profit, you’ll start with your business’s revenue and then subtract your expenses, including operating costs, interest and taxes over a specific period of time. 

The basic net profit formula looks like this:

Total revenue - Total expenses = Net profit

Total revenue represents all the money your business brings in. Total expenses include all the costs of running the company and may include:

• Daily operating expenses, like employee salaries, rent and utilities
• Cost of goods sold (COGS)
• Taxes and interest
• Non-cash expenses, such as depreciation and amortization 

After you deduct those costs from your revenue, what’s left is your net profit.

Here’s a look at how to find net profit for a few different types of businesses.

First, consider a small retail shop with revenue of $50,000. The business’s expenses for inventory, rent, utilities and payroll total $35,000. Using the net profit calculation, its net profit would be $15,000.

$50,000 - $35,000 = $15,000

Independent contractors or freelancers can also calculate their net profit. Say a graphic designer working for several marketing companies has a total revenue of $8,000. After subtracting expenses equaling $3,000, which may include software, equipment and taxes, their net profit is $5,000.

$8,000 - $3,000 = $5,000

Finally, net profit for a larger business can be calculated the same way. Take a popular local restaurant with revenue of $200,000. After subtracting expenses, like food costs, employee wages and rent totaling $180,000, the net profit is $20,000.

$200,000 - $180,000 = $20,000

These examples show that net income can vary widely among different businesses. And even if a business has a higher revenue, it may not have much left over in net profit after accounting for its expenses.

Gross profit and net profit are similar in that they both measure a business’s profitability and help evaluate its overall financial performance. But they look at your company’s finances differently.

Gross profit shows you how efficiently you’re producing and delivering your products or services. In other words, it helps you understand how much you’re spending to produce and sell them, so you can see if they’re actually generating a profit. To calculate gross profit, you’ll subtract COGS from your revenue. The formula for gross profit looks like this:

Total revenue - COGS = Gross profit

Net profit takes it further, showing you what’s left after you subtract all your expenses, not just production costs. For example, say your company has revenue of $100,000 with COGS totaling $30,000. 

$100,000 - $30,000 = $70,000: Gross profit

Your gross profit would be $70,000, as you’re only subtracting COGS. But to get net profit, you’ll go a step further and deduct your remaining expenses, which, for the sake of this example, we’ll say total $50,000. In the net profit formula, all expenses, including COGS, are considered. So your net profit would be $20,000. 

$100,000 - $80,000 = $20,000: Net profit

So, gross profit lets you know if your core offerings themselves are profitable, while net profit reveals how profitable your overall business is.

You can help increase your business’s net profit by refining your pricing, managing costs more effectively and finding ways to improve overall performance. Increasing net profit basically comes down to increasing revenue or lowering expenses—or ideally, both. Here are some tips to get you started:

Evaluate your bestselling products and services, especially in comparison to competitor pricing. You may be able to increase prices slightly without impacting demand.

Take a close look at and track your business expenses to determine where you may cut costs. Maybe you have subscriptions you’re not using regularly or some travel costs you can reduce. Or maybe you can renegotiate contracts with vendors and suppliers.

As you’re evaluating your current pricing strategies and expenses, take note of which products are selling best and which aren’t. Focus on the most profitable products and consider phasing out those that may be costing your business more to keep in inventory than they generate in revenue.

Look for processes that can be streamlined and repetitive tasks that can be automated. By creating efficiencies in your daily operations, you may be able to reduce waste and increase output without increasing your costs.

Consider expanding your current product lines to complement your existing offerings and appeal to your customers. Or you can identify new markets to enter that may help increase revenue.

Find ways to retain your existing customers by offering loyalty programs, discounts and follow-up services. Ask for and listen to customer feedback to implement changes that can improve customer satisfaction and drive repeat business.

Knowing your business’s net profit provides a clear picture of how well your company is really performing, beyond just revenue. When you calculate it regularly, compare it to gross profit, and make strategic adjustments to pricing, expenses and operations, you can make more informed decisions for the future, setting your business up for long-term growth and success.

Using the right business credit card can also help boost your company’s profits. Capital One offers a variety of business credit cards designed to help you manage expenses while potentially earning great rewards. You can even check to see if you’re pre-approved before applying—with no impact on your credit scores.