In business, the term net profit refers to the profit earned after subtracting expenses and all other costs from revenue. This means that net profit can be calculated by subtracting income from expenses.
Net profit is also an important aspect in business, in fact it is also a reference that shows whether the company’s finances are healthy or not.
Because, a high net profit figure shows that the company has large profits with a healthy financial condition.
What is the Difference Between Net Profit and Gross Profit?
Talking about net profit naturally involves gross profit. These two components are interrelated and can be calculated over the same period.
So, net profit is the profit obtained by subtracting gross profit from all operating costs.
Meanwhile, profit or gross profit refers to all income that can be used to pay all costs included in the cost of goods sold (COGS).
Often, companies will make this gross profit part of their financial comparison calculations, for example the Financial Ratio Gross Profit Margin or Gross Income Margin.
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How to Calculate a Company’s Net Profit
Net profit shows the total final figure after being separated by various reducing factors, such as operational, production, non-operational, and tax costs.
To better understand how to calculate profit, you need to first know the formula used, such as:
- Net Profit (Gain) = Total Income – Total Expenses.
- Net Profit (Profit) = Gross Profit – Expenses (Budget) Expenses.
- Net Profit Margin (%) = (Net Profit/Total Revenue) x 100%
- Net Profit (Profit) = Net Profit Margin (%) x Total Income
In practice, calculating net profit can be more complicated. This depends on the type of business and the cost components involved.
Therefore, large companies generally utilize financial and accounting programs so that the method of calculating company profits becomes shorter, more practical, and easier.
However, if you pay attention to the formula mentioned earlier, you can actually try to calculate the net profit from the business you run without having to use the help of a particular program.
Try following these steps.
1. Calculate the amount of income
The first thing in calculating net profit is to create a calculation scheme related to the amount of income or the amount of sales that have been made.
This component is called gross profit. This income amount is calculated based on a specific period or timeframe, such as monthly or annual income.
2. Calculate the amount of expenses/spending
After calculating the amount of income, the next step is to calculate the amount of expenses or other purchases made.
For example, calculating the total cost of goods sold or COGS, purchasing raw materials, operational costs, and all other expenses related to non-operational expenses.
Meanwhile, the cost of goods sold (COGS) is the total cost incurred for production needs. This cost includes the purchase of raw materials, supporting equipment, and other expenses related to the process of creating a product or service.
Meanwhile, operational costs are associated with costs for the needs of renting a location, paying employee salaries, maintenance, and promotion.
Meanwhile, non-operational costs refer to costs for other needs, for example credit interest expenses or the amount of loss incurred from the disposition of an asset.
3. Calculate the tax burden
The next step is to calculate the tax burden you must pay over the specified period. The tax amount will generally be calculated based on your income and the applicable tax rate.
4. Calculate net profit
In fact, net profit is the amount of income or profit that is not included in expenses.
This means you can calculate your net profit simply by subtracting your income from your spending or expenses.
You can calculate net profit by using the formula: Net Profit = Total Income – Total Expenses.
If these expenses include operational, non-operational, and production costs, and the cost of paying taxes, you can calculate profit using the following formula.
Net Profit = Total Income – (Total Operating Costs + Tax + Production + Non-operating).
Also read: Learn How to Calculate Percentage Increases, Very Important for Business!
The Importance of Net Profit for Business
Aspiring entrepreneurs might wonder whether net profit is important. The answer is absolutely yes.
First, net profit will help companies determine steps toward financial stability. This will lead to net income or profit, which in turn leads to more promising returns.
Not only that, as a business owner, calculating net profit can also help you understand your company’s financial position compared to other similar businesses.
Net profit also helps companies create a bigger picture of their business, identify weaknesses, and help create more focused business development plans.
If the business you run makes a large net profit, as the owner, you will certainly think about the best strategy to use the remaining budget to expand or develop your business even bigger.
For example, you might explore new opportunities, hire more employees, or increase your promotional budget.
That’s how to calculate profit, which you need to know as a business owner. Also, ensure your business continues to run optimally by using the Labamu app.
This application has various features that can support business operations, starting from POS Cashier to facilitate transactions and raw material management to facilitate more comprehensive raw material management.
Plus, easy access with the desktop version of the app. Let’s use Labamu!
