Net profit

Net profit is the money a business keeps once other operating expenses and interest have been taken off its trading profit. It is what is left from gross profit after you subtract those costs.

Other operating expenses are the running costs that are not part of cost of sales, such as rent, wages, marketing and administration. Interest is the cost of borrowing money.

The formula

Net profit = gross profit − other operating expenses and interest

Learn this by heart. It is not given in the exam, so you need to recall it and use it accurately. Work through it in two steps: pick out the gross profit, then add together every operating expense and interest charge before you subtract.

Worked example

A garden centre has gross profit of £72,000. Its rent, wages, marketing and administration come to £44,000, and interest on a loan is £5,500, so its other operating expenses and interest total £49,500.

Net profit = £72,000 − £49,500 = £22,500

The garden centre has turned £72,000 of trading profit into £22,500 of overall profit, because £49,500 was used up by running the business and paying for borrowed money.

What a net loss means

If other operating expenses and interest are greater than gross profit, net profit is negative. The business has made a net loss. Suppose the same garden centre had expenses and interest of £80,000. Then £72,000 − £80,000 gives a net loss of £8,000. Trading made money, but not enough to cover everything else. You would write this as −£8,000 or as a net loss of £8,000.

Net profit shows the overall profit after other operating expenses and interest have been paid, so it shows how well a business controls those costs. It is a money amount, always written with the currency unit used in the question, never as a percentage. A percentage version is covered by net profit margin.