What is net profit?

Definition of net profit

Net profit is usually a business’s bottom line: its total income minus its total day-to-day running costs. As such, a business’s net profit calculation will usually include both all of its costs and all of its income.

Some businesses choose to include tax and interest with their costs when calculating net profit, while others don’t.

How to calculate net profit

A simple formula for calculating net profit is:

Total income - total day-to-day running costs = net profit

Net profit margin

A business's net profit divided by its total income is known as its net profit margin. This metric shows how much profit the business has made as a percentage of total revenue. Net profit margin is always written as a percentage.

A simple formula for calculating net profit margin is:

(Net profit / total income) x 100 = net profit margin

Net profit vs. operating profit

Businesses can choose to take additional costs such as taxes and interest into account when calculating net profit, whereas taxes are not used (and interest is not usually used) when calculating operating profit. If a business chooses not to take taxes or interest into account when calculating its net profit, or if it takes interest into account for both, then its net profit figure is likely to be similar or identical to its operating profit. 

If you’re not sure how to use these metrics to help you make decisions for your business, speak to your accountant for advice.

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