What is Net Profit & How to Calculate It (+Examples)
Table of Contents
Net profit is the amount of profit after subtracting all expenses from revenue. These expenses include the cost of goods sold (COGS), operating expenses (such as marketing, salaries, and rent), interest on debt, and taxes.
It is the final profit a business keeps—which helps reveal the true financial performance and profitability of the business within a specific period.
Calculate net profit using this formula: Net Profit =Total Revenue - Total Expenses
This guide will walk you through what net profit is, how to calculate it, why it matters, and practical steps to improve it in your business.
Quick Recap:
- Net profit is the final profit a company reports after subtracting all types of expenses from its revenue. These costs include the cost of goods sold (COGS), operating expenses, interest payments, and taxes.
- Net profit is calculated by subtracting all expenses from a business’s total revenue.
- Net profit is the metric that matters most because it reveals your true profitability after all costs.
What is Net Profit?
Net profit (also called net income, net earnings, or the bottom line) is the amount of money a business has left after subtracting all expenses from its total revenue.
These costs include the cost of goods sold (COGS), operating expenses, interest payments, and taxes. It reflects the actual profitability of the business over a specific period and indicates how much remains from revenue after all expenses are fully accounted for.
Harry Chu, the founder of TrueProfit, once shared his thoughts on this north-star metric: "Think of net profit as the final score—it reveals how efficiently your business turns revenue into actual earnings."
Further Reading
What is the Net Profit Formula?
Net profit is calculated by subtracting all expenses from a business’s total revenue.
To evaluate profitability relative to revenue, you can calculate the net profit margin. Net profit margin represents the ratio of net profit to total revenue, expressed as a percentage. It is calculated by dividing net profit by total revenue and multiplying by 100 to get a percentage
Further Reading
How to Calculate Net Profit?
Calculating net profit involves these steps:
Step 1: Calculate Total Revenue
Total revenue includes all income generated from sales of products or services, along with any additional income such as interest or proceeds from asset sales.
Using this formula:
Step 2: Calculate Total Expenses
Like we said above, total expenses include all costs incurred to operate the business, typically including:
- Cost of Goods Sold (COGS)
- Operating expenses (salaries, rent, utilities)
- Taxes
- Interest on loans
- Depreciation and amortization
- Other administrative or selling expenses
Step 3: Apply the Net Profit Formula
Subtract total expenses from total revenue to calculate net profit.
The result will show your net profit if positive or a net loss if negative, providing a clear measure of your business’s true earnings for the period.
For example, your business records $60,000 in total revenue for the month. This includes income from product sales and a supplier rebate.
The business’s total expenses for the month are:
- Cost of Goods Sold (COGS): $30,000
- Operating expenses (advertising, salaries, software): $15,000
- Taxes: $3,000
- Interest on loans: $500
- Depreciation and amortization: $1,000
Total expenses are calculated as:
Total Expenses = $30,000 + $15,000 + $3,000 + $500 + $1,000 = $49,500
The net profit can then be calculated using the formula:
Net Profit = $60,000 – $49,500 = $10,500
In this example, the business achieves a net profit of $10,500 for the month. This metric shows the actual earnings retained after all product costs and operating expenses have been paid, providing a clear view of the business’s true profitability.
Further Reading
Why Is It Important?
Net profit is a key indicator of a business’s financial health. It is important because it helps you:
- Measures true profitability. It indicates how efficiently a business converts revenue into actual profit.
- Identifies areas for improvement. A low net profit can highlight high expenses or pricing issues, helping you adjust strategies to increase profitability.
- Make decisions based on your bottom line: It indicates which activities contribute to your bottom line and which do not.
- Tracks financial health over time: Monitoring net profit regularly helps you see if your business is becoming more or less profitable, ensuring you take action before problems grow.
Net profit works alongside other essential ecommerce metrics like gross profit, operating profit, and customer acquisition costs to give you a complete view of your business’s financial health.
Further Reading
How to Optimize Your Net Profit?
If your net profit isn’t where you want it to be, consider these practical steps. Small tweaks to your pricing, costs, and operations can greatly impact your profit optimization.
1. Fix your attribution model before optimizing campaigns.
Connect ad spend to actual profit outcomes, not just conversions or revenue.
2. Cut unprofitable products even if they generate revenue.
20% of products often lose money when all costs are included.
Further Reading
3. Negotiate everything every 6-12 months.
Payment fees, shipping rates, and supplier terms improve as your leverage grows.
4. Reduce overhead costs
Audit expenses like rent, subscriptions, and software fees to cut unnecessary spending.
Want to Track Net Profit Easily?
In short, net profit is like a window into your business’s financial health and long-term sustainability. By understanding how to calculate and improve your net profit, you’ll make smarter decisions that help your business grow.
However, calculating net profit manually can be time-consuming and prone to errors. That’s why we created TrueProfit—a net profit analytics platform designed for Shopify sellers. With TrueProfit, you can instantly see your true profit without dealing with complex formulas or manual tracking.
Net Profit FAQs
What does net profit mean?
Net profit is the money your business keeps after paying all expenses, taxes, and costs. It's your actual earnings that show whether your business is truly profitable.
How do you get net profit?
You get net profit by taking your total sales and subtracting all expenses, including the costs to produce your products, run your business, and pay taxes. This shows your business’s actual earnings.
Does net profit include owners' salary?
No, the owner's salary is typically treated as an operating expense and subtracted before calculating net profit. Net profit is what remains after paying all expenses, including owner compensation.
How is net profit calculated?
Net profit is calculated by subtracting all expenses, including COGS, operating expenses, taxes, and interest, from your total revenue. This final number shows how much your business actually earns.
What is the difference between net profit and average profit?
Net profit is your actual profit after all expenses. Average profit typically refers to your mean profit over a specific time period, such as average monthly or quarterly net profit.
How does a company calculate net profit?
A company calculates net profit by taking its total revenue and subtracting all business expenses, such as production costs, operating costs, interest, and taxes. This tells the company how much profit it keeps after paying for everything.
How to work out net profit?
To work out net profit, add up all the money your business has made (revenue), then subtract all the expenses you’ve paid to run your business during that period. The amount left is your net profit.
Why is net profit important to a business?
Net profit shows whether your business is actually making money and is financially sustainable. It guides pricing decisions, investment choices, and helps you understand your true business performance beyond just sales volume.
How much profit should a $2 million dollar business make?
A $2 million business should typically generate $200,000-$400,000 in net profit (10-20% margin). However, profit expectations vary significantly based on industry, business maturity, and growth investment levels.
What is net profit vs gross profit?
Gross profit is revenue minus cost of goods sold (COGS). Net profit goes further by subtracting all operating expenses, marketing costs, taxes, and other business expenses from gross profit.
How do I calculate net profit?
Net Profit = Total Revenue - All Expenses. Include cost of goods sold, operating expenses, marketing costs, taxes, and any other business expenses in your calculation.
What is net income vs gross?
Net income is your total earnings after all expenses and taxes are deducted. Gross income is your total revenue before any expenses are subtracted. Net income and net profit are essentially the same thing.
Is net profit your income?
Yes, net profit represents your business income after all expenses. However, as a business owner, you may also receive a separate salary, which is considered an expense in the net profit calculation.
What's a good net profit?
A good net profit margin for eCommerce businesses typically ranges from 10-20%. However, this varies by industry, business model, and growth stage. New businesses often have lower margins initially.
Content Executive at TrueProfit & eCommerce Content Specialist
Leah Tran is a Content Specialist at TrueProfit, where she crafts SEO-driven and data-backed content to help eCommerce merchants understand their true profitability. With a strong background in content writing, research, and editorial content, she focuses on making complex financial and business concepts clear, engaging, and actionable for Shopify merchants.
