Profit & margins
Net profit formula: how to calculate net profit
The net profit formula is revenue minus cost of goods sold, operating expenses, interest and taxes. For an online store: take sales after discounts and refunds, subtract what the products cost you, every running cost such as ads, shipping and apps, then interest and tax. What's left is net profit.
The net profit formula
Net profit = Revenue − COGS − Operating expenses − Interest − Taxes
- Revenue
- sales after discounts, returns and refunds
- COGS
- landed cost of the products you sold
- Operating expenses
- ads, shipping, payment fees, apps, staff, rent and other running costs
- Interest
- interest on loans and credit lines
- Taxes
- income tax on the business's profit
It's easiest to calculate in two steps, starting with gross profit:
Gross profit = Revenue − COGS Net profit = Gross profit − Operating expenses − Interest − Taxes
And as a percentage:
Net margin % = Net profit ÷ Revenue × 100
Worked example
Worked example: one month for a Shopify storeExample numbers
| Input | Amount |
|---|---|
| Net revenue | $47,000 |
| COGS | $19,000 |
| Operating expenses (ads $8,000, shipping $4,200, fees $1,400, apps $600, staff $6,000, other $1,200) | $21,400 |
| Interest | $200 |
| Taxes | $1,300 |
- Gross profit = $47,000 − $19,000 = $28,000
- Gross margin = $28,000 ÷ $47,000 = 59.6%
- Net profit = $28,000 − $21,400 − $200 − $1,300 = $5,100
- Net margin = $5,100 ÷ $47,000 = 10.9%
The Shopify profit margin calculator subtracts COGS, shipping, payment fees, ad spend and other costs, but not interest or taxes. Its result is profit before tax and interest, which is closer to operating profit. To get true net profit, subtract interest and tax from its result.
The four numbers to track
| Number | Formula | Example |
|---|---|---|
| Gross profit | Revenue − COGS | $28,000 |
| Gross margin | Gross profit ÷ Revenue | 59.6% |
| Net profit | Gross profit − Opex − Interest − Taxes | $5,100 |
| Net margin | Net profit ÷ Revenue | 10.9% |
Gross numbers tell you whether your products and prices work. Net numbers tell you whether the whole business does.
Want this tracked automatically, every day?See which Google Ads campaigns actually make money, measured on real profit (POAS), not just revenue.Try Selvra OSCommon mistakes when calculating net profit
- Starting from gross sales. Subtract discounts, returns and refunds first, or revenue and margin are overstated.
- Using supplier price as COGS. Include freight, duties and packaging: the landed cost.
- Forgetting small recurring costs. App subscriptions, software and bank fees add up.
- Counting inventory purchases as expenses. Stock you buy but haven't sold yet isn't an expense; it becomes COGS when it sells. See how to calculate COGS.
- Mixing up profit and cash. A profitable month can still leave you with less cash if you bought a lot of stock.
Gross, operating and net profit
Net profit sits at the bottom of three profit levels. The guides to gross profit vs net profit and the operating profit formula walk through the levels in between. To see what's typical for your industry, see what a good profit margin is.
FAQ
How do you calculate net profit?
Start with revenue after discounts and returns, then subtract cost of goods sold, all operating expenses, interest and taxes. What's left is net profit. Divide it by revenue for net profit margin.
What's a good net profit margin?
It depends heavily on the industry. US public companies range from under 3% to over 13% depending on the sector. The guide to what a good profit margin is has sourced benchmarks.
Is net profit before or after tax?
After. Net profit subtracts taxes. Profit before tax is a separate figure, sometimes called pre-tax profit.
Should I include my own salary?
If you pay yourself a salary, it's an operating expense. If you take money out as owner's drawings instead, it isn't an expense on the P&L, so your net profit will look higher than a business that pays a manager. Bear that in mind when comparing.