How to calculate net profit

Last Updated on 04/10/2024
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Your net profit, or net income, is a vital business metric used in understanding how much money you’re making after considering your business expenses and running costs.

While gross profit only considers your COGS or cost of goods sold, net profit goes further. Net profit includes every overhead to reveal the overall profitability of your small business.

Net profit formula

The formula used to calculate net profit is as follows:

Net Profit = Revenue – Total Costs

Gross profit = revenue - cost of goods sold Gross profit margin = (revenue - COGS) ÷ revenue × 100

What are total costs?

To understand your net profit, you must first calculate ‘total costs’, or every single expense you incur in running your business. This includes materials, rent, marketing, power, wages, taxes, depreciation et cetera.

Net profit margin

Your net profit margin is a useful way of expressing your net profit for reporting and planning purposes. When you can see your business’s profitability as a percentage, instead of a whole number, you have a clearer overview of your performance.

A higher net profit margin means you’re making more money per dollar spent. Once you understand your net profit margin, you can monitor when it dips too low and can work to improve it.

Net profit margin formula

To calculate net profit margin, the formula is as follows:

Net Profit Margin = (Revenue – Total Costs) / Revenue x 100

Net profitability

Generally, to calculate profit margin, you’ll need to know the percentage of revenue you have left after deducting all the expenses you incurred in generating that revenue.

Indeed, your net profitability paints a stark picture of how much money you’re making after all expenses are accounted for. It is an extremely useful metric that shows you how healthy and profitable your business is.

 

See related terms
What Is net profit?
What Is gross profit?
Gross profit vs net profit
How to calculate gross profit margin?

 

About the Author

Alex Neighbour

Senior Writer
Alex Neighbour is a highly experienced senior writer who excels at exploring and explaining topics in the accounting and small business space, including software, technology, finance, bookkeeping, and business management.

Alex Neighbour

Senior Writer
Alex Neighbour is a highly experienced senior writer who excels at exploring and explaining topics in the accounting and small business space, including software, technology, finance, bookkeeping, and business management.

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Disclaimer
This glossary is intended for small business owners and contains definitions suited to their needs. For more comprehensive explanations, we recommend consulting an accounting or bookkeeping professional. Reckon does not offer accounting, tax, business, or legal advice.

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