Net profits are the bottom line for every company and they are very important. For those who are in the economic industry or are interested in the economic market, net profit is a very familiar term, but for many others, until now, the formula for calculating net profit is unknown. how is the net profit?
Table of Contents
- 1 What is net profit?
- 2 Net profit formula
- 3 Why must calculate net profit? What is the purpose of net profit calculation?
- 4 Net profit margin formula
- 5 The related formulas for calculating net profit:
- 6 The difference between net profit and gross profit
- 7 Factors affecting net profit
- 8 How to increase net profit?
- 9 Summary
What is net profit?
Net profit is the remaining amount of money after paying tax, interest, preference dividends and other expenses incurred in the course of an enterprise for a period of 1 year. Another name is net interest, net income.
Net profit is significantly affected by operating expenses of the business. Therefore, to increase net profit, it is necessary to save these costs. Current operating expenses of businesses usually fluctuate at 5%.
Net profit formula
Net Profit = Total Revenue – Total Expenses
Example: A company has $450,000 in revenue with a cost of goods sold of $50,000. That leaves them with a gross profit of $400,000. If $95,000 is allocated for salaries, $35,000 to operating expenses and $10,000 to taxes, those numbers are then subtracted from the gross profit, leaving a net income of $260,000.
Selling expenses include actual costs incurred in the process of selling products, goods, providing services, including costs of offering, introducing products, advertising products, sales commissions. , product and goods warranty costs (except construction and installation activities), costs of storage, packaging, transportation, salaries of sales staff (salaries, wages, allowances, .. .), social insurance, health insurance, trade union funding, unemployment insurance, worker accident insurance; cost of materials, labor tools, depreciation of fixed assets used for the sales department; services purchased from outside (electricity, water, telephone, fax, …); expenses in other money.
Enterprise management costs include the general management costs of the enterprise including the salary costs of the employees of the enterprise management department (salaries, wages, allowances, …); social insurance, health insurance, trade union funding, unemployment insurance of the enterprise manager; costs of office materials, labor tools, depreciation of fixed assets used for enterprise management; land rental, license tax; the provision for bad debts; outside services (electricity, water, telephone, fax, property insurance, fire …); expenses in other money (reception, customer conference …).
Fluctuations in net profit should be carefully and carefully considered and if the company’s net profit is low then there will be many problems from falling sales to poor customer experience …
Why must calculate net profit? What is the purpose of net profit calculation?
Shareholders will often keep a close eye on the net profit of the business because this is their source of income. In addition, through net profit also assesses whether the company’s business is going up or down and this has a proportional relationship with the price of the stock.
Net profit margin formula
Reflects the net income (profit after tax) of the business compared with its revenue. This is an index used to determine the profitability of a company. It is expressed as a percentage, the higher the percentage, the more profitable the company will be. If the margin is low, it shows that the business is facing many problems preventing profit potential. Like unnecessary expenses, productivity or management problems, …
Net profit margin = Profit after tax / Revenue
Example: If an enterprise’s after-tax profit is PHP 1 million and its revenue is PHP 10 million. Net profit margin is 10%
The stability of the net margin between industries depends on the economic cycle. Enterprises, when well managed, achieve relatively higher net profits. Because these businesses manage their capital more effectively.
The reason for the decrease in the net profit margin is the increase in profit after tax is lower than the revenue growth. Besides, there are also many other reasons related to tax. Such businesses begin to pay taxes after a number of years of exemption. This can lead to a sharp drop in the net profit margin.
Net profits can be calculated in different ways. Here are some of the most popular ways to calculate net profits today.
- Sales = product price × quantity sold
- Gross profit = sales – selling expenses and other direct costs
- Operating profit = gross profit – investment costs and other indirect costs
- EBIT (pre-interest and tax income) = operating profit + non-operating income
- Earnings before tax (EBT, pre-tax income) = operating profit – an item and provision payments, employee restructuring – interest payable
- Net profit = Profit before tax – taxes
- Earned income = Profit after tax – dividends
The difference between net profit and gross profit
Gross profit is profit when revenue is collected minus cost of goods sold. Is the profit value first calculated in the business results.
Net profit is the amount of profit that is calculated by subtracting the cost of sales and subtracting the remaining costs and taxes due. Net profit equal to gross profit minus remaining expenses and taxes payable. This is the value of profit calculated at the end of the business results.
Gross profit margin reflects how much profit the company can create per penny of revenue, this value only focuses on the profit that the company achieved in the past year.
Net profit is the value reflecting all of the company’s expenses, revenue and profit. This value allows investors and shareholders to know how much the business has invested and whether the revenue and profits are worth what they have invested or not. Shows the profitability of the organization.
Each value will have many effects that reflect different information. Enterprises need to combine commenting by using all these achievements and indicators to get the most accurate view of the business performance.
Factors affecting net profit
To determine which factors affect net profit, let’s look directly at the formula for determining net profit, specifically, it includes the following 3 factors:
- Operating costs of the business: Of course, if you want high profits, you must minimize costs and if the business owner does not know how to spend appropriately, the net profit will be modest. business will get worse. Therefore, businesses need to carefully consider financial matters, save reasonable expenses so that the maximum cost is only 30% of the company’s revenue.
- Original product price: The original cost of the product is also part of the cost. In order to minimize the original price of the product, you need to research the market carefully, learn a lot of sources, consider among suppliers to make the initial cost the least. And when the product price is less, the profit earned for the business is higher.
- Corporate income tax: The corporate income tax rate is collected according to the State regulations, it cannot be increased or decreased at will, so in order to make a profit, it is necessary to raise the selling price of products and reduce costs.
How to increase net profit?
There are many ways to increase your net profit and here are 3 typical ways:
- Method 1: To increase the value, it is necessary to improve the capacity and this value can be converted into money.
- Method 2: To increase the value requires increasing working time, there is a need for machine tools to improve productivity and more profits will be created. Please know how to approach the advanced technology development to apply technology in production to improve labor productivity.
- Method 3: To increase value, increase production scale as well as expand scale, larger area, increase human resources … depending on the company’s conditions.
Above is all information about net profit. Hopefully, through this article, you have accumulated a little knowledge about net profit for yourself and try to increase the net profit for your business.
Refer: Net income – Wikipedia