Net profit: what it is and how to work it out

Net profit is the money a business has left after all its costs, including interest and tax, have been taken off its income. It is the last line of the profit and loss account, which is why it is often called the bottom line.

The British Business Bank’s glossary describes the profit and loss account as a statement showing the income and outgoings of a company over a period of time, giving the net profit or loss for that time. “Net” means after deductions: everything that had to come out has come out.

A negative result is a net loss. It means the business spent more than it earned in that period.

Net profit = total income − total costs, where total costs include the cost of making or buying what you sell, overheads, interest on borrowing and tax. The same sum can be built up in steps, which is how it appears in the accounts.

Gross profit is income less only the direct cost of what you sell, while net profit is what remains after every other cost, interest and tax as well. Net profit is therefore always the lower figure, unless the business has other income.

Gross profit tells you whether each sale is worth making. Net profit tells you whether the whole business is. A firm can have a healthy gross profit and a small net profit because its overheads are heavy. Our guide to gross profit margin covers the first step in detail, and our guide to the profit and loss account shows the full layout.

Net profit margin is net profit divided by income, multiplied by 100 to give a percentage. In the illustration it is £40,500 ÷ £500,000 × 100, which is 8.1%.

The British Business Bank’s glossary describes margin as the amount of money a company makes, expressed as a percentage. The percentage lets you compare periods of different sizes, or your business against its own history. It is not a target: sensible margins vary widely between sectors, so compare like with like.

Every cost of running the business in the period comes off, whether it was paid in cash or not. The common mistakes are leaving items out, so check the list below against your own accounts.

• Direct costs: materials, stock bought for resale, subcontractors on a job.
• Overheads: wages, rent, utilities, insurance, software, marketing, accountancy fees.
• Depreciation: the reduction in value of assets over time, usually through wear and tear.
• Interest: the cost of loans and overdrafts.
• Tax: Corporation Tax for a company.

Loan repayments need care. The interest part is a cost. The part that repays the amount borrowed is not, because it reduces what you owe rather than what you earned. Your accountant can confirm how each item should be treated.

A limited company pays Corporation Tax on its profits, so the tax charge reduces net profit. As of October 2026, GOV.UK gives a main rate of 25% for profits over £250,000 and a small profits rate of 19% for profits of £50,000 or less, with Marginal Relief possible between the two.

Those thresholds are reduced for short accounting periods and by the number of associated companies. The profit used for the tax calculation is worked out under tax rules and can differ from the accounting profit, so the tax line in your accounts is something to agree with your accountant rather than calculate from a headline rate. Our guide on how to pay Corporation Tax covers the payment side.

No. Net profit measures what the business earned after costs, while cash is what is actually in the bank, and the two often differ. A sale counts as income when you make it, but the money may arrive weeks later.

That is how a profitable business runs short of cash: the profit is sitting in unpaid invoices or unsold stock while wages and tax fall due. A cash flow forecast shows the timing that net profit hides, and working capital shows how much cushion there is between what you hold and what you owe in the short term.

Lenders usually look at profit as one of several signs that a business can afford repayments, together with cash flow, existing debt and the balance sheet. Each lender sets its own criteria, so net profit is not a pass mark.

They tend to look at the trend over more than one period as well as the latest figure, and at whether profit is being kept in the business or paid out. A small net profit does not rule out finance, and a large one does not guarantee an offer. Our guide to business loan requirements lists the other things a lender may ask for.

Capzy is a credit broker, not a lender, and is paid by the lender. We introduce businesses to lenders that match the finance they need, and the lender assesses your figures.

If you want to see what might be available, you can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria.