Net profit is the clearest single number for whether your business is actually making money. Revenue can look healthy while costs quietly eat everything underneath it — net profit is what’s left after they do. This page walks through exactly how the figure is calculated, works through a full example with real numbers, and covers where people commonly get it wrong.
How net profit is calculated
Net profit is built in two steps. First you find gross profit, then you subtract everything else the business spends.
Gross profit = Revenue − Cost of goods/services sold
Net profit = Gross profit − Operating expenses − Taxes paid
Revenue is all the income for the period. Cost of goods/services sold (COGS) is the direct cost of delivering the work — materials, subcontractors, production costs, anything tied directly to the product or service you sold. Subtracting COGS from revenue gives you gross profit: what’s left before you account for running the business day to day.
From gross profit, you subtract operating expenses — rent, software, admin, marketing and general overhead — and then taxes paid. Whatever remains is net profit: the actual amount the business kept.
A related figure, net margin, expresses net profit as a percentage of revenue:
Net margin (%) = (Net profit ÷ Revenue) × 100
Margin is useful because it lets you compare profitability across periods or against other businesses regardless of size. A business earning $55,000 net profit on $120,000 revenue is performing very differently from one earning $55,000 on $1,000,000 revenue, even though the dollar figure is identical.
A worked example
Say your business brought in $120,000 in total revenue for the year. Delivering that work — materials, subcontractors, direct production costs — cost $20,000 in cost of goods/services sold. On top of that, running the business cost $30,000 in operating expenses (rent, software, admin, marketing), and you paid $15,000 in taxes.
First, gross profit: $120,000 − $20,000 = $100,000.
Next, subtract operating expenses and taxes from gross profit: $100,000 − $30,000 − $15,000 = $55,000 net profit.
Finally, net margin: $55,000 ÷ $120,000 × 100 = about 45.8%.
So out of every dollar this business brought in, roughly 45.8 cents was kept after every cost — direct and indirect — was paid. Plug these same numbers into the calculator above and you’ll see the identical result, broken down step by step.
A common mistake: confusing gross profit with net profit
The most common error is stopping at gross profit and calling it the bottom line. Gross profit only accounts for the direct cost of delivering the work — it ignores everything it costs to actually run the business around that work. A business can have a strong gross profit and still be unprofitable once rent, software subscriptions, admin time, marketing spend and taxes are subtracted. If you’re checking whether your business is genuinely profitable, net profit — not gross profit — is the number that answers the question.
A second mistake is leaving taxes out of the calculation entirely. Taxes paid are a real cash outflow like any other expense, and skipping them overstates how much profit the business actually kept.
What else affects your net profit
The formula is fixed, but several things change the inputs you feed into it:
- How you classify costs. Whether an expense counts as cost of goods/services sold or as an operating expense affects gross profit and net margin even though it doesn’t change the final net profit figure. Be consistent period to period so your numbers stay comparable.
- Timing of revenue and expenses. Net profit reflects the period you’re measuring. Invoices issued but not yet paid, or expenses incurred but not yet billed, can shift the number depending on when you record them.
- One-off versus recurring costs. A single large expense — new equipment, a one-time legal fee — can make a normal period look unusually unprofitable. It’s worth tracking net profit over several periods rather than judging your business on one.
- Accuracy of your bookkeeping. This calculator only does arithmetic — it can’t catch a missing invoice or a miscategorized expense. The output is only as reliable as the revenue, cost and tax figures you put in.
This tool gives you an estimate based on whatever you enter — it isn’t pulling numbers from anywhere else and isn’t a substitute for your own records. Use the calculator at the top of this page to plug in your own revenue, costs and taxes, and revisit it each period to see whether your net margin is moving in the direction you want.