It is important to know how to calculate net profit and how to define it even if you are not an accountant. The reason to learn is that you are on this page that shows you are associated with the business. To manage the bookkeeping of your company, the knowledge of fundamental business terms and calculations will be helpful. If you intend to determine the net profit of your company, you are considering knowing the financial health as well.
Moreover, this will not be wrong to say that this process will give you some insight into the performance of your company, however, this will not cover all the details.
Before we delve deep into the discussion, let’s see what is the point of discussion in this article. This includes the following:
- How to Define Net Profit?
- Why is Net Profit Important?
- How to Calculate Net Profit?
- The Bottom Line
How to Define Net Profit?
When multiple business expenses are subtracted from the revenue, the amount we are left with is considered as net profit. This includes taxes, business operating expenses, interest and other expenditures to carry out a business. We know net profit also as net income. Also, it is known with the term bottom line because of the fact that it occurs at the end of a company’s statement.
In case your company’s net profit is negative or low, this indicates poor management, fewer sales, poor pricing, ineffective customer services and other negative factors. Whereas, a negative and high net profit indicates favourable factors for the company’s growth.
The net profit varies depending on the growth of the industry or the company you are associated with.
Why is Net Profit Important?
The importance of net profit is prominent for multiple reasons. It is a clear way to indicate the financial stability of a company. It depends on what is your role in the business market, net profit offers different advantages as well. For instance:
- It helps investors to analyse and decide whether a company’s financial health is worth taking the risk of investment or not.
- The creditors can use it to see the company is stable enough to offer the loan or not.
- As an owner, the clear picture of where your company stands is determined through the net profit.
- The comparison with other similar businesses in the market is also done by using net profit comparison.
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How to Calculate Net Profit?
To get the advantages of the net profit, the need is to learn how to calculate net profit. The details of multiple formulas to calculate net profit is listed below for you.
net profit = total revenue – total expenses
Another formula is as given below:
net profit = gross profit – expenses
However, if you need to calculate the net profit margin, you need to divide net profit by the revenue and then multiply it by 100. The formula is mentioned below:
net profit margin = ( net profit / total revenue ) x 100
The required steps to take while you are calculating net profit are mentioned with details further like:
1- Total Revenue:
It is a must to calculate total revenue before the formula of net profit is applied. Moreover, the total revenue is the total amount of receipts that are from the sales. In case when you don’t know how to determine total revenue, you can simply multiply the price of the goods by the number of products sold.
2- Total Expenses:
Business expenses in total mean the amount that is spent before the net income. If you wish you calculate, simply subtract net income from the total revenues.
3- Final Step:
Now that you have both values of total expenses and total revenue, you can subtract both the values to determine net profit.
The Bottom Line:
Now that you have developed a better understanding of what is net profit and how to calculate net profit, we can sum up the discussion by saying that net profit gives a clear picture of the financial health of a business and helps to make decisions not only for the business owner but also the creditors and investors.
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Disclaimer: This article intends to provide general information based on how to calculate net profit.