Net Profit or Net income describes the total revenue subtracting all the expenses. Net Profit can be calculated using a number of different formulas that take into account various factors such as sales and cost of goods sold. It is one of the most important elements in determining the profitability of an organization or company. The calculation of net profit also forms the basis for many financial ratios used to gauge the overall financial health of a company.
There are two common ways to calculate net profit: The first is to take total revenue and subtract all expenses, including the cost of goods sold (COGS). This method is often used by public companies as it provides a more accurate picture of true profitability. The second way to calculate net profit is to take total revenue and subtract only operating expenses, which excludes the cost of goods sold. This method is often used by small businesses or startups as it provides a more optimistic view of profitability.
When calculating net profit, it is important to use the correct formula for the desired purpose. For instance, if you are trying to determine how much revenue your company needs in order to break even, you would use the formula that subtracts all operating expenses from total revenue. Conversely, if you are trying to calculate how much profit your business would make after paying taxes or debt service, you would use the formula that subtracts only COGS from total revenue.
No matter which formula you use, net profit is always calculated by subtracting expenses from revenue. This number can be positive or negative, and it provides valuable insights into the overall financial health of a company. If a company has a negative net profit, it means that its expenses are greater than its revenue and it is running at a loss. If a company has a positive net profit, it means that its revenue is greater than its expenses and it is profitable.
How is Net Profit Calculated?
Net profit is calculated by subtracting all expenses (including taxes and interest) from total revenue.
What Does Net Profit Tell Us?
Net profit tells us how much money a company has made after taking into account all of its costs and expenses. It provides an indication of the overall financial health of the business.
Fun Fact:
"According to the U.S. Small Business Administration, small businesses had an average net profit of 7.2% in 2018." (U.S. Small Business Administration, 2019)