Definition: What Is Net Profit?

1. Net Profit Definition

Net Profit—also called Net Income—is the amount of money your business actually keeps after paying all of its expenses.

Think of it as your company’s true “bottom line.” It’s what’s left after you subtract operating costs, interest, taxes, and any other expenses from your total revenue.

Formula:

Net Profit = Total Revenue – Total Expenses

If you see the term “Net Income” on your financial statements, it means the same thing.

2. Why Net Profit Matters to Small Business Owners

Net Profit isn’t just an accounting number—it’s the clearest indicator of your business’s financial health. Here’s why it matters:

• Shows true profitability: You might have strong sales, but if expenses are too high, profit can disappear.

• Drives business valuation: Lenders, investors, and buyers use net profit to determine how valuable your business really is.

• Informs decision-making: Knowing your net profit helps you decide whether to expand, hire, or cut costs.

• Impacts taxes: Your taxable income is based on net profit, not revenue.
  

In short, you can’t manage what you can’t measure—and net profit tells you if your business is actually making money.

3. Common Examples or Use Cases

Here are a few simple examples:

• Example 1: Your coffee shop earns $500,000 in sales and spends $400,000 on rent, payroll, supplies, and taxes. Your net profit is $100,000.

• Example 2: An e-commerce store brings in $250,000 in revenue but has $260,000 in total expenses. That means the business has a net loss of $10,000.

• Example 3: A consulting firm tracks net profit monthly to ensure project margins stay healthy.
  

By reviewing net profit regularly, business owners can spot trends and adjust before small issues turn into big financial problems.

4. Related Terms or Misconceptions

Commonly Confused Terms:

• Gross Profit: Revenue minus direct costs (like materials or labor), but before accounting for rent, utilities, or taxes.

• Operating Profit: Profit after operating expenses, but before taxes and interest.

• Cash Flow: Measures money in and out, not profitability. A business can have positive cash flow but still show a net loss if it’s borrowing heavily.
  

Tip: Many small business owners mistakenly use “profit” and “cash flow” interchangeably—but they measure different things.

5. Tips for Applying This Concept in a Real Business

Here’s how to make net profit a practical part of your financial management:

• Review monthly: Look at your income statement every month to see how your net profit is trending.

• Compare to goals: Set a target net profit margin (e.g., 15–20%) and track performance against it.

• Use bookkeeping tools: Consistent bookkeeping helps ensure your profit numbers are accurate. Learn more about professional bookkeeping and payroll support here.

• Reinvest strategically: Use profits to build reserves, pay down debt, or fund future growth.

According to Investopedia, net income is one of the most important metrics for evaluating a company’s overall profitability and financial performance.

Bottom Line: Understanding your Net Profit (Net Income) is essential to running a successful small business. It’s more than just a number—it’s a reflection of how efficiently you turn revenue into real, sustainable earnings.