What is net profit?
Net profit is the proverbial bottom line of your business. It is the money you make that doesn’t go back into expenses, taxes, and interest; the net profit that is left over.
In business planning, you’ll find net profit listed in your financial statements, on both the cash flow and as the bottom line of your profit and loss statement.
This metric shows you how much your business is bringing in after everything has been paid for. At the end of the day, if your business is profitable, this will be a positive (and hopefully large) number.
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So, how do you know where your net profit stands? The standard calculation for net profit (also called net income and/or earnings) is your operating income minus taxes and interest.
Let’s break that down.
Operating income is your revenue from sales minus your operating expenses and cost of goods sold, or “COGS.” This means the money coming in from your sales, less all of your bills including the direct costs of sales. Operating income is also sometimes referred to as EBITDA, or earnings before interest, taxes, depreciation, and amortization.
Some financial analysts consider operating income to be as important as the net profit itself, so make sure this is a robust sum.
From this number, you subtract your taxes and any interest payments the company has to pay on its loans. The result is your net profit.
Here is a visual example of operating income listed on a profit and loss statement:
You’ll notice that in this snippet, the words “or loss” are included on this line item to allow for the fact that, when things are going badly, this can be a negative number.
The higher it is, the better for your business
Net profit is understandably a metric that you’ll always want to see positive, and as high as it can be.
If this number is negative, your business is probably in trouble. You’ll need to check your cash flow to get an accurate reading on not just your profit from sales, but the actual cash on hand your business has to stay afloat.
It’s essential to remember that a profitable business can still go under if it’s cash flow negative.
While your net profit could be a nice high number, if you’ve got a lot of that money tied up in assets or you’re selling heavily on credit, you still need to be certain you have the working capital to cover your bills.
How can you increase your net profit?
Net profit is a question of sales versus expenses. To raise your net profit, consider possible ways to increase your revenue and limit your spending. Almost any money-saving tips for businesses will put you in the right direction.
For more business concepts made simple, check out these articles on direct costs, cash burn rate, operating margin, accounts payable, accounts receivable, cash flow, profit and loss statement, balance sheet, and expense budgeting.