What is net profit?
Net profit is a measurement of your business’s profitability after you’ve deducted all business expenses from your revenue.
This essential metric tells you how much profit you’re taking home from sales, after accounting for all the business costs you incurred in making those sales and running your business.
What does net profit tell you?
Your net profit (or net income) will tell you the true overall profitability of your business.
Every business will incur expenses in making revenue. These overheads could be rent, wages, materials, taxes et cetera. Your net profit will account for these expenses—and reveal how much money you’re really making.
Expenses that factor into net profit
To calculate your net profit, you’ll need to add up every business cost and operating expense you incurred in creating revenue and in operating your business.
These costs can include, but are not limited to:
- delivery and transport
- power and gas.
To arrive at your true net profit, you need to diligently account for every imaginable business expense before you deduct these from your overall revenue.
How to calculate net profit
To calculate net profit for your small business, use the following formula:
Net Profit = Revenue − Total Costs
Net profit example
Net profit is calculated over a given timeframe. Let’s say you took home $10,000 in revenue in one month. In that same month, you incurred total costs of $6000. This means your net profit is $4000.
Net profit margin
Your net profit margin is another way of expressing your net profit—namely as a percentage to see how much of your revenue is true profit.
To calculate your net profit margin, use the following formula:
Net Profit Margin = (Revenue − Total Costs) / Revenue x 100
Using the example above, this would be $4000 / $10,000 x 100. So, your net profit margin would be 40%.
Know the difference between gross profit and net profit
While a company’s net profit considers all overhead costs and operating expenses, your gross profit only accounts for COGS (cost of goods sold).
Your COGS are only the direct production costs involved in creating your product or delivering your service. This means gross profit is useful for understanding the cost per sale, but not the overall profitability of your business.
This glossary is intended for small business owners and contains definitions suited to their needs. For more comprehensive explanations, we recommend consulting an accounting or bookkeeping professional. Reckon does not offer accounting, tax, business, or legal advice.
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