How to measure the net profit obtained?
So you need to know how to calculate the net profit obtained by your company? Below you will find exactly what you need, and as an added extra we will also distinguish it from gross profit.
You want to earn money, right? It’s the main reason for any business, no one starts a business to throw money away or abandon it after a short period because the profits are not there. So, if your business has been successful in business rule #1: Make money, then let’s explain how you can calculate the net obtained by your company.
But first, let’s take a look at what net profit is, and why, and how it’s different to gross profit.
Net or Gross profit. What’s the difference?
- Net profit is the amount of money that a business has after it has paid all of it’s obligations and outgoings, in the form of taxes and expenses. This type of profit needs to be calculated relative to a specific period of time in order to create a realistic vision of the economic result that the company has obtained.
- Gross profit refers to the overall resulting value if you take the total income of your company, and then subtract any variable costs. Variable costs can vary as they increase and decrease depending on the amount of sales or production that you have invoiced in a specific time.
So to calculate your net profit, you need to work out your gross profit first, that’s why it’s essential to understand the difference.
What steps do I need to know about to calculate my net profit?
The calculation comes from a specific formula and as such there aren’t too many steps to address, however, you need to ensure you have each part of the necessary data well controlled, and accurate. You can then apply the corresponding formula.
There are however, a few factors that influence the calculation, so let’s take a look at them before we cover the formula itself.
- Changes in demand. Take into account inflation, seasonality, trends, and international economy as these will all play a part in your demand curvature.
- Raw material cost variations. As this is out of your control, there’s nothing you can really do about this, but it’s important to know that it will affect you profit margin.
- Labor cost. Salary raises and new rules and regulations being implemented by the government may affect how much you’re paying your staff.
The Net Profit formula
Now that you’re clear about the above, it’s time to cover the calculation that is going to provide you with your net profit;
Gross profit – Taxes – Interest – Depreciation – General expenses
Anything that appears after the gross profit in the above formula, will vary and depend on your business, you’ll need to find these out for yourself before being able to calculate your net profit. Now, go, find out how much your business is worth. You can also skip all of the headache by introducing Holded’s great accounting software, which lets the use of technology do all the work for you.