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Beginner

What is net profit

Also known as: net income, net earnings, bottom line, profit after tax, how to calculate net profit, net profit margin

Definition

Net profit is what a business keeps from revenue after every expense, cost of sales, running costs, interest and tax. It is the bottom line, not cash.

Why it matters

Net profit is the final test of whether the business makes money after everyone else has been paid: suppliers, staff, the landlord, the lender and the tax authority.

Common mistakes

Confusing net profit on paper with cash in the bank that can be taken out.

Related terms

Worked exampleIllustration

A small business's month, down to net profit

Profit and loss, one month

  • Revenue₪100,000
  • Cost of goods sold-₪40,000
  • Gross profit₪60,000
  • Operating expenses (rent, salaries, marketing, software)-₪35,000
  • Operating profit₪25,000
  • Loan interest-₪2,000
  • Profit before tax₪23,000
  • Tax, calculated by the accountant
  • Net profit, the bottom line

Steps

  1. Gross profit: revenue minus the cost of goods sold, 100,000 - 40,000.₪60,000

  2. Operating profit: gross profit minus rent, salaries, marketing and software, 60,000 - 35,000.₪25,000

  3. Profit before tax: operating profit minus the loan interest, 25,000 - 2,000.₪23,000

  4. Net profit: profit before tax minus the tax the accountant calculates. No rate is shown, because it depends on the legal form of the business.

Customers still owe ₪40,000 at month end, so the bank shows less than the net profit.

Illustration

Down the P&L to the bottom line

  1. Revenue₪100,000
  2. Cost of goods sold (COGS)-₪40,000
  3. Gross profit₪60,000
  4. Operating expenses-₪35,000
  5. Operating profit on the P&L₪25,000
  6. Loan interest-₪2,000
  7. Profit before tax₪23,000
  8. Tax

    Calculated by the accountant, by the legal form of the business. No rate is shown.

  9. Net profit

    Profit before tax, ₪23,000, minus the tax.

Profit before tax is ₪23,000. Net profit is that minus the tax the accountant calculates. Customers still owe ₪40,000, so the bank shows less than the net profit.

The business's month, step by step. The tax row has no number: it depends on the legal form of the business, and the accountant calculates it.

Definition

Net profit, also called net income or the bottom line, is revenue minus every expense of the period: the cost of sales, operating expenses including depreciation, interest and other finance costs, other income and expenses, and tax. It is not cash: it counts invoices that customers have not paid yet, so a profitable business can still run out of money. IAS 1 calls this line profit or loss for the period, and US GAAP calls the same bottom line net income. It is the last rung of a ladder with a name on every step: revenue, then gross profit after the cost of sales, then operating profit after operating expenses, then profit before tax after finance costs, then net profit after tax. The name "bottom line" comes from its place, the last line of the P&L. Net profit margin, net profit ÷ revenue × 100, lets you compare months or businesses of different sizes. For a sole trader in Israel, the owner's own pay is not an expense of the business, so the business's net profit is also the owner's income before personal tax: income tax and National Insurance are paid personally, outside the business P&L. A company is a separate taxpayer that pays corporate tax on its own profit, and its shareholders pay again on dividends.

Why it matters

Revenue shows the volume, net profit shows the result. A positive net profit on the P&L still does not mean the cash is in the bank, because customers may not have paid yet.

Directly related: P&L, Gross Profit, Gross margin.

Formula

Net Profit = Gross Profit - Operating Expenses + Other Income - Other Expenses - Interest - Taxes

How to calculate net profit

In words, the formula above reads: net profit equals gross profit minus operating expenses, plus other income, minus other expenses, interest and taxes. Or from the top of the report: revenue minus every expense of the period, step by step:

  1. Gross profit: revenue minus the cost of goods sold.
  2. Operating profit: gross profit minus operating expenses, such as rent, salaries, marketing and software.
  3. Profit before tax: operating profit plus other income, minus other expenses and interest.
  4. Net profit: profit before tax minus tax.

The month in the example above runs these steps with illustrative numbers: ₪100,000 of revenue becomes ₪23,000 of profit before tax. The net profit margin is net profit divided by revenue, times 100.

Improvement tips

  • Review the fixed operating expenses regularly and cut what does not earn its keep.
  • Push the sales channels and products with the best margin, which lift net profit more than raw volume does.
  • Discuss the tax side with a qualified accountant, rather than treating tax planning as a way to raise profit.
  • Track net profit margin month by month, so you compare like with like as revenue changes.

Common mistakes

  • Forgetting that a sole trader's own pay is not a business expense: the business's net profit is the owner's income before personal tax and National Insurance.
  • Assuming that growing sales will raise net profit without any control of overhead.
  • Calling operating profit net profit, before interest and tax are taken off.
  • Leaving depreciation out, although it sits in operating expenses and lowers profit even in a month when no cash goes out for it.
Gross Profit vs Net Profit

Related terms

FinanceBeginner

P&L

A P&L (profit and loss statement, or PnL) sums up a business's revenue and expenses for a period and shows if it made or lost money. Profit on it is not cash.

FinanceBeginner

Gross Profit

Gross profit is revenue minus the cost of goods sold (COGS): what is left from sales after goods, materials and direct labour. Rent and salaries come from it.

FinanceBeginner

Gross margin

Gross margin is the share of revenue left after the cost of goods sold: (revenue - COGS) ÷ revenue × 100. At 60%, 60 agorot of each shekel remain.

FinanceBeginner

Overhead

Overhead is the indirect cost of running a business, like rent, bookkeeping, insurance and admin salaries, that cannot be traced to one product or customer.

FinanceBeginner

Cash flow

Cash flow is the money coming into and going out of a business's account in a period. A profitable business can still run short of cash when customers pay late.

FinanceBeginner

Revenue

Revenue is everything a business sold in a period, before any costs and without the VAT on the invoice. It is the P&L's top line, not profit and not cash.

From the blog

Cash Flow vs Profit: Why Profit Is Not Cash

Why profitable businesses still run out of money, and how timing, receivables, VAT, and owner draws change the bank balance.

How a Business Consultant Can Increase Your Profitability

How a consultant improves profit through diagnosis, margin discipline, customer mix, operations, cash flow, and realistic execution.

Quick check

A business has a month's revenue of ₪100,000, cost of goods sold of ₪40,000, operating expenses of ₪35,000 and loan interest of ₪2,000. What is its profit before tax, the last step before net profit?

Choose an answer

Frequently asked questions

Do I need to understand net profit before starting a business?
Yes. Net profit is the test of whether the business model makes money once everyone is paid. Knowing how to calculate it stops you from launching something with strong sales and no profit.
When does net profit first become relevant for a new business?
As soon as you can estimate your prices, direct costs, overhead and financing costs together. That estimate shows whether the business will hold up once all the bills are paid.
How do I plan for a positive net profit in a new business?
Keep fixed overhead low and set prices that leave a healthy gross margin above your direct costs. That margin is the buffer that absorbs surprises before they reach the bottom line.
Can a new business survive with a negative net profit at first?
Yes, many do while they build the product and the customer base. But the losses have to be covered by savings, a loan or investors until the business turns profitable, so know how long that money lasts.
Why does net profit matter for a business that is already running?
It shows whether the business creates value after every cost, or slowly loses money while looking busy.
What goes wrong when an owner ignores net profit?
Owners spend on marketing, staff or office space because sales are growing, and find out at year end, when tax or loan payments fall due, that the business made little or nothing.
How do I track net profit without stopping daily work?
Read the bottom line of your monthly profit and loss report and compare its net profit margin with previous months. Most bookkeeping software produces the report automatically.
How can I improve net profit?
Raise prices where the market allows, cut overhead that does not earn its keep, focus on the products with the best margin and renegotiate large fixed costs such as rent and insurance.
What does net profit mean in plain words?
It is what the business really earned in a period after subtracting everything: the cost of what it sold, the running costs, interest and tax. It is the bottom line of the P&L.
Is net profit the same as the cash in my bank account?
No. Net profit counts sales you have invoiced but not yet collected, and expenses you have recorded but not yet paid. A business with a healthy net profit can still have an empty bank account.
Do I need an accountant to calculate net profit?
You can follow a monthly net profit yourself from your bookkeeping. The annual figure and the tax on it need an accountant, and where the tax sits depends on your legal form: a company pays corporate tax on its own profit and shareholders pay again on dividends, while a self employed person pays personal income tax and National Insurance on the business profit, outside the business P&L. A business consultant helps you read the numbers and act on them. Educational material, not tax or legal advice.
What is the difference between operating profit and net profit?
Operating profit is what is left after the cost of sales and the operating expenses, and it shows whether the business itself works. Net profit comes after interest, other income and expenses, and tax as well. A business can have a healthy operating profit and a thin net profit if its loans are heavy.

Sources: IFRS Foundation, IAS 1 Presentation of Financial Statements, profit or loss for the period, checked September 2026

Last reviewed: 2026-09-27

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