How to calculate business profit: net income, margins and cash

What does business profit mean?

The basic formula is profit = income − expenses for the same accounting period. A positive result is a profit; a negative result is a loss. “Net income”, “net earnings” and “net profit” commonly refer to the final result after all recognised expenses, including company income tax where applicable.

Revenue is normally the income from ordinary sales of goods or services. Other income may include interest or a gain on an asset disposal. Calling every receipt “sales” hides how the result was generated. Read our revenue and turnover guide for the distinction.

Match income and expenses to the relevant period. A supplier payment this month can relate to stock not yet sold, an annual subscription covering future months or an asset used over several years. Subtracting every bank payment from every receipt will not necessarily produce accounting profit.

Gross profit, EBITDA and net income

Swipe sideways to see the full table.

The exact presentation depends on the business and its accounting framework. Gross margin in a retailer is not directly comparable with gross margin in a consultancy unless you understand which costs each includes. EBITDA is a useful indicator, but it excludes real economic costs such as replacing equipment and does not measure available cash.

For goods, distinguish purchases from the cost of goods sold. Closing inventory means some purchases remain on the balance sheet. Do not deduct the same cost once through inventory movements and again as an additional expense.

A worked Swiss company example

Consider one month in a small Swiss LLC. The figures exclude recoverable VAT, and personnel costs include the working owner’s salary. The tax amount is an illustrative assumption, not a Swiss statutory rate.

Swipe sideways to see the full table.

Each subtotal answers a different question. The CHF 14,000 gross profit must still cover staff and overheads. The CHF 6,000 EBITDA does not yet reflect depreciation, interest or tax. The CHF 4,250 net income is the final result under these assumptions.

A one-off gain can increase the final result without improving the underlying activity. Compare recurring performance separately when deciding whether a business model is becoming more profitable.

Calculate and interpret profit margins

Profit margin = relevant profit ÷ revenue × 100. Always identify which profit measure you use.

Swipe sideways to see the full table.

There is no universal “good” net margin. The answer depends on the sector, risk, investment needs, maturity and how the owner is remunerated. An owner working without a market-level salary can make a business appear more profitable than a comparable company with a fully costed management team.

Compare the same definition across periods. Then investigate price changes, discounts, product mix, purchasing costs and staff productivity instead of relying on the final percentage alone.

Why profit is not cash flow

A credit sale may create revenue before the customer pays. Buying equipment uses cash immediately, while depreciation spreads its accounting cost over its useful life. A loan provides cash without creating sales; repaying its principal uses cash without normally creating an expense. Interest is treated separately.

In the example above, CHF 500 of depreciation reduced profit without using cash in that month. If trade receivables also increased by CHF 5,000 because customers had not paid, cash generated could be much lower than the reported profit. Inventory, supplier balances, tax payments and investment add further differences.

Read the income statement together with the balance sheet, aged receivables and a cash forecast. A profitable company can face payment difficulties if it finances customers for too long or commits too much cash to stock and equipment.

Accounting profit and taxable profit

The tax return starts from the accounts, but adjustments may be required. Non-business expenditure, unsupported provisions and other non-deductible items can increase taxable profit. Admissible loss carryforwards and specific tax rules may reduce the taxable base.

For a Swiss LLC or corporation, income tax expense forms part of the company’s accounts. The applicable burden depends on location and circumstances, not one nationwide percentage. Our corporate tax guide explains the calculation and cantonal comparisons.

For a sole proprietor, the owner’s personal income tax is not a business salary expense. Drawings reduce the owner’s funds in the business rather than reducing profit like an employee’s wage. That distinction is essential when comparing a sole proprietorship with an incorporated company.

Use the result to make decisions

• Compare actual figures with your budget and the same period last year.
• Separate recurring performance from exceptional income and expenses.
• Identify whether growth comes from volume, pricing or a change in the sales mix.
• Review discounts, purchasing terms, staffing and recurring overheads.
• Check that improving profit also produces sustainable cash generation.

Retaining profit strengthens equity, but the amount shown as net income is not automatically distributable. Prior losses, statutory reserves, corporate approvals and liquidity must be considered before a dividend. Taking cash out without checking those constraints can weaken an otherwise profitable company.

Use a regular reporting rhythm. A short monthly review of sales, margin, overdue receivables and cash is often more useful than discovering the year’s result only when the annual accounts are completed.

Frequently asked questions