Glossary · Finance
What is Net Profit?
Definition
Net profit is what remains of your revenue after every expense, including cost of goods, overhead, interest, and taxes, has been paid.
Net profit = total revenue − total expenses (COGS + overhead + interest + taxes)
Why it matters
Net profit is the true bottom line. A business can have healthy sales and still lose money if expenses quietly exceed income.
A bookkeeping service might bring in $6,000 in a month. Contractor help costs $1,500, software $300, insurance $150, and the owner's marketing $450. Net profit before income tax is $6,000 minus $2,400, or $3,600. After setting aside roughly 25 percent for taxes, take-home from the business is closer to $2,700.
Track net profit monthly so you can see trends. Tax treatment depends on your entity type and state, so ask an accountant how your net profit will be taxed.
Common mistakes
- !Counting your gross sales as your income and spending money that has not actually been earned.
- !Forgetting that you also owe self-employment tax on net profit in many sole proprietor setups.
Frequently asked questions
What is Net Profit?
Net profit is what remains of your revenue after every expense, including cost of goods, overhead, interest, and taxes, has been paid.
How do you calculate Net Profit?
Net profit = total revenue − total expenses (COGS + overhead + interest + taxes)
What mistakes do beginners make with Net Profit?
Counting your gross sales as your income and spending money that has not actually been earned. Forgetting that you also owe self-employment tax on net profit in many sole proprietor setups.
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