The 2 key things you need to calculate net profit
Net profit is a key measure that most small businesses track to monitor their profitability. Knowing your net profit is important as it tracks the amount of money a business has earned after accounting for all its expenses. In this blog post, we'll teach you the two key things you need to calculate net profit for your small business.
Calculate Total Revenue
To calculate net profit, you must first determine your small business's total revenue. Revenue is the amount of money your company has earned from the sale of its products and services. Revenue covers all sales generated by the business, including things like:
- Sales from products: If you sell candles, this will be the revenue from your candle sales.
- Sales from services: For example, fees charged for consulting or advice.
- Rental income from property or equipment you lease out.
- Commission earned from selling third-party products or services.
- Licensing fees for the use of intellectual property such as patents, trademarks, or copyrights.
Calculate Total Expenses
Next, you will need to determine your small business's total expenses. Your expenses include all the costs associated with running your business, such as the cost of goods sold, staff costs, rent, utilities, business insurance and other expenses.
"Your expenses include all the costs associated with running your business, such as the cost of goods sold, staff costs, rent, utilities, business insurance and other expenses"
Calculate Net Profit
Now that you have these two numbers (total revenue and total expenses), you can calculate the net profit by subtracting the total expenses from the total revenue. For example, if your company has total revenue of $200,000 and total expenses of $170,000, your net profit would be $30,000 ($200,000 - $170,000 = $30,000) for the year.
When looking at net profit for a business, it's essential to compare the net profit to industry benchmarks and previous periods to assess the business's financial performance over time. Additionally, understanding the underlying drivers of the net profit, such as changes in sales volume or pricing, can help identify opportunities for improvement and growth.
Net profit is just one measure of a company's financial performance. It should be considered along with other financial metrics to get a complete picture of your small business's financial health. Some companies may be more profitable than others, and some may make a net profit every year, while others may only make a profit sometimes. In general, making a net profit is a goal for most small businesses, as it indicates that the business generates more revenue than it is spending on expenses.
A good time to calculate your net profit is at the end of the financial year. It allows you to see how much your business has made over the year and how much you have spent. This information can help prepare your taxes, create a budget for the next financial year, or make strategic business decisions such as where to cut costs if appropriate.
You can easily use Thriday to calculate your net profit automatically, reducing time wasted by you on small business admin. Just create an account with Thriday today to access automated financial reporting, including income statement (Profit and Loss), cash flow and balance sheet reports.
Net Profit FAQs
What is net profit?
Net profit is the amount of money a business has earned after deducting all expenses, including taxes and interest, from its total revenue.
How is net profit calculated?
Net profit is calculated by subtracting all expenses, taxes, and interest from a business's total revenue for a specific period.
Why is net profit important?
Net profit is important because it reflects a business's overall financial health and profitability. It also serves as an important indicator of the effectiveness of a company's management.
How can a business increase its net profit?
A business can increase its net profit by increasing revenue, reducing expenses, or both. This can be achieved by increasing sales, reducing production costs, improving operational efficiency, and implementing cost-saving measures.
What are some common factors that can impact a business's net profit?
Some common factors that can impact a business's net profit include competition, changes in the market, economic conditions, supply and demand, and changes in consumer behaviour. Other factors may include rising costs of raw materials or labour, changes in government regulations or tax laws, and unexpected events such as natural disasters.
Calculating your net profit is crucial to running a successful small business and only requires two key things – total revenue and total expenses. Tracking net profit over time can help identify areas for improvement and determine the effectiveness of different strategies. By regularly calculating and analysing net profit, small business owners can make better-informed decisions to drive success and achieve their long-term goals.