What is net profit?
Net profit is what a business earns after every cost has been deducted from revenue, including direct costs, overheads, interest and tax.
What net profit means
Net profit is the bottom line of the profit and loss account. It shows whether the business made money once everything is accounted for. The basic formula is:
Net profit = revenue − cost of sales − overheads − interest − tax
People use the term loosely. Sometimes it means profit before tax, sometimes after. For a company, the figure after Corporation Tax is what is available to keep or pay out as dividends. For a sole trader, accounts show profit before tax, because the tax is personal.
Example
| Line | Amount |
|---|---|
| Revenue | £300,000 |
| Cost of sales | (£120,000) |
| Gross profit | £180,000 |
| Overheads, including salaries and rent | (£135,000) |
| Interest | (£3,000) |
| Profit before tax | £42,000 |
| Corporation Tax at 19% | (£7,980) |
| Net profit after tax | £34,020 |
Net profit margin after tax is £34,020 ÷ £300,000 = 11.3%.
Why it matters for your business
Net profit tells you whether the whole business model works. A healthy gross profit can be swallowed by overheads, so tracking both shows where the problem is. Lenders and buyers look at the trend over several years.
It is not the same as cash. Profit is recognised when you invoice; cash arrives when customers pay. Buying stock or equipment uses cash without reducing profit much, and repaying a loan uses cash without touching profit at all. A profitable business can still run out of money, which is why cash flow matters as much.
For tax, accounting net profit is adjusted. Depreciation, client entertaining and some other costs are added back, and capital allowances deducted, to reach taxable profit.
Net profit vs gross profit
Gross profit only deducts direct costs. Net profit deducts everything. In the example, gross profit is £180,000 but net profit after tax is £34,020.
Improving net profit
There are only a few levers: charge more, sell more, cut the direct cost of each sale or reduce overheads. Price is usually the most powerful. On the figures above, a 5% price increase with no loss of customers adds £15,000 to revenue and almost all of it to profit, while a 5% cut in overheads saves £6,750.
Common questions
It varies widely by sector. Many small service businesses achieve 10% to 25% before tax, while retail and hospitality are often 2% to 10%. Compare your margin with similar businesses and your own past years rather than a single benchmark.
It can be either, so check which is meant. Company accounts show profit before tax and profit after tax separately. When someone quotes net profit for a sole trader, they usually mean before income tax.