How to calculate net profit?

To calculate net profit, simply subtract the total expenses incurred by the business from the total revenue:

Here’s a detailed overview of all variables:

• Total revenue is income generated from the sale of goods or services 
• Total expenses are costs incurred in running the business, including:
  • Cost of goods sold (COGS): direct costs associated with producing the goods or services
  • Operating expenses: ongoing costs of running the business, such as rent and salaries
  • Interest expenses: costs of borrowing money
  • Taxes

To calculate net profit, follow these steps:

• Gather your company’s financial records for the desired period
• Identify your total revenue from sales
• Calculate your total expenses by summing up all expense categories mentioned above
• Subtract total expenses from total revenue to calculate your net profit

Frequently asked questions

What’s the difference between net profit and gross profit?

While net profit considers all expenses, including operating expenses and taxes, gross profit represents the profit remaining after deducting the cost of goods sold (COGS) from revenue. It doesn’t factor in other operating expenses.

Net profit provides a more comprehensive picture of a company’s profitability, while gross profit offers a preliminary measure of efficiency in managing production costs.

How can a company improve its net profit?

There are two main approaches to improve net profit:

• Increase revenue using strategies such as expanding sales channels, developing new products or services, or increasing prices 
• Reduce expenses by cutting unnecessary costs, negotiating better deals with suppliers, or improving operational efficiency