Accountancy
What is net profit?
The net profit of a company signifies the totality of its financial health as well as the efficiency of the managerial skills of its management. Also commonly regarded as net income or net profitability, this metric is important to understand how your business is really doing in terms of profit making. Want to know more about this metric, its calculation, and application? Keep reading!
A team of experts will get you the answers you need to get started with your business.
What is net profit?
Net profit is the money left after all expenses including those from fixed costs, taxes, wages, depreciations, etc. has been subtracted from the total sales. This is unlike the gross profit where you only subtract the variable expenses like cost of raw materials and sometimes the absorption costing.
What are the components of net profit?
There are two main components of the net profit: Total Revenue and Total Expenses.
The total revenue is the total sales made by the company excluding the cost of damaged and returned goods.
Total expenses on the other hand includes cost of goods sold (including discounts), taxes, fixed costs (rent, shipment, etc.), salaries and wages, depreciations, marketing, employee benefits, machinery and maintenance, office supplies, etc. You literally include everything spent by the company towards producing the goods and services you have sold.
How to calculate net profit?
Net profit is calculated using the formula:
Net Profit = Total Revenue – Total Expenses
While the calculation is this simple, the trick is to be able to collate all the necessary parts that make up each of the components.
What is net profit margin?
For easy understanding, we can say that net profit margin or net profit is the measure of the company’s actual profit in relation to the revenues it generated. It is calculated using the formula:
Net Profit = Total Revenue - Total Expenses
What are the applications of net profit?
By calculating your business’ net profit, you will be able to understand
- Your company’s overall financial health. When you have correctly calculated your company’s net profit, the result gives you an idea of whether your company is in good standing, needs to liquidate, or improve quality.
- The profitability of your company’s business. The net profit measures whether your company is profitable or not. You can have a substantial gross profit only to have lost it all with inadequate managerial processes.
- How to improve profitability. Unlike the gross profit, the net profit takes into account every expense made by the company. As such, it is an easier way to know where your company is bleeding money from and you can thus block such areas.
Conclusion
The net profit of a company gives a better understanding of how much money a company makes in profit for every good sold. It gives investors an idea of how much they stand to benefit if they are to invest in your company.
What are the differences between net profit and gross profit?
1. The gross profit differs from net profit because gross profit only takes cognizance of the cost of goods sold as expenses
The net profit on the other hand considers cost of goods sold, taxes, operation expenses, depreciations, interests, amortizations, etc. as total revenue
A team of experts will get you the answers you need to get started with your business.
