Net Profit

Posted by Luke Jones in Sep, 2014

What is Net Profit?

Net profit is a measure of the profitability of a venture after accounting for all costs. Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is an important measure of how profitable the company is over a period of time. This measure is also used to calculate earnings per share.

What is Net Profit like?

Net Profit is like feeding a large family for lunch, the family eats what they can and what is left is the net amount of food. The same principle applies to net profit, the family are your costs, your food is your income and the left overs are your net profit.

What is the purpose of a Net Profit?

To determine if a company is successful or not and the most common way is to look at the net profits of the business. Net Profit is an important measure of how profitable the company is over a period of time.

What are the different types of Net Profit?

EBIT is a type of net profit that is calculated before interest and taxes. It is worked out by combining operating profit and non-operating income.
Pretax Profit (EBT, earnings before taxes) is another form of net profit, which is calculated by operating profit subtracting one off items and redundancy payments and staff restructuring subtracting interest payable.

What’s involved with calculating Net Profit?

Total Revenue ($ Figure) – Total Costs ($ Figure) = Net profit ($ Figure)

Where does calculating Net Profit fit into the reporting process of a business?

A profit and loss or income statement fits into the end of your business reporting period and lists your sales and expenses and is generally recorded on a monthly, quarterly or yearly basis. It reports how much real profit the business is making or losing. A profit and loss statement can help you develop sales targets and an appropriate sales price for goods/services using tools like the break-even, profit margin and mark up calculators.

How does calculating Net Profit impact on different areas of the business?

Net profit impacts on different areas of the business by being able to cover the costs of the business, how the business is able to perform which is an indication on how the business is running costs wise and if the business is able to expand due to having net profit or contract due to having a net loss.

What terms are used when calculating Net Profit?

• Sales Revenue = Price (of product) multiply by the Quantity Sold.
• Gross profit = Sales Revenue minus cost of sales and other direct costs.
• Operating profit = Gross profit minus overheads and other indirect costs.
• EBIT (earnings before interest and taxes) = operating profit + non-operating income.
• Pretax Profit (EBT, earnings before taxes) = operating profit minus one off items and redundancy payments, staff restructuring minus interest payable.
• Net profit = Pre-tax profit minus tax.
Where can I find more information about calculating Net Profit?

http://en.wikipedia.org/wiki/Net_profit
http://www.investopedia.com/terms/n/netincome.asp
http://www.business.gov.au/Information/business-plan-template-and-guide/Business-plan-template/the-finances/Pages/Profit-and-loss-statement.aspx

Who would most benefit from this knowledge?

• A person with no experience in this area and existing workers.
• All, staff, team leaders, senior managers.
• Australian Commonwealth Law
• No cultural influence.
• No, climate does not affect net profit.
• Startups, Small to Medium Enterprises, Corporations, Non-profit organisations, and Government departments/Government owned entities.
• Relevant to all industries.