Net Profit

Posted by Melissa Ramsden in Jul, 2014

What is net profit?

Net Profit is a total of the amount of money earned or lost after subtracting all of the expenses from the Gross Profit.

What is net profit like?

Net profit is like an old car, at first it might not work but with hard work, determination, dedication and on going maintenance it can take off.

What is the purpose of net profit?

The purpose of calculating the Net Profit is to determine whether during a certain period of time (generally a month, quarter or year) the business has made a profit or a loss. Net Profit would be key in deciding if the business and its expenses are being managed correctly. If the net profit is low or the business is running at a loss then they would need to assess the expenses or the pricing of the goods or services.

What are the different types of net profit?

The different types of Net Profit are as listed below:
• EBIT: total earnings before interest and taxes
• EBT: total earnings before tax
• EBITDA: earnings before interest, taxes, depreciation and amortization.

What’s involved with calculating net profit?

Net Profit is calculated by adding all of the businesses expenses, for example: rent, wages, electricity, tax, accounting and legal fees and any interest on debts. Once all expenses are calculated you subtract this amount from the Gross Profit. Example of reaching net profit below:
Step 1. Income from Sales = Product Price x QTY sold
Step 2. Gross Profit = income from sales – cost of product or service
Step 3. Operating Profit = Gross profit – overheads
Step 4. Earnings before interest and tax (EBIT) = operating profit + operating income e.g. a once off large payment
Step 5. Earnings before tax (EBT) = operating profit – once off large pay out or redundancy payouts etc. – tax payable
Step 6. Net Profit = Profit before tax – tax
Gross Profit – expenses = Net Profit.

Where does calculating net profit fit into the reporting process of a business?

A business will calculate their net profit in the Profit and Loss Statement/Financial Statement or if starting a business, in the Prediction Statement.

How does calculating net profit impact on different areas og the business?

Net profit would impact on:
• Paying off debts owed or any additional credit applications
• Owner salary
• Expansion, growth, new opportunities
• Staffing
• Emergencies or risk if net profit is low
• Investment

What terms are used when calculating net profit?

Revenue: total amount of money a business/company receives during a certain period
Expenses: is the opposite of revenue. It is the cost of goods, staffing, tax, leasing etc.
Gross Profit: revenue minus cost of goods/services

Where can I find more information about calculating net profit?

Below is a list of three links to websites with more information on Net Profit:

• 1. http://www.smallbusiness.wa.gov.au/components-of-a-profit-and-loss-statement/
• 2. http://www.business.qld.gov.au/business/running/making-and-managing-money/understanding-financial-terms-and-reports/understanding-profit-and-loss-reports
• 3. file://localhost/1. http/::www.investinganswers.com:financial-dictionary:financial-statement-analysis:net-profit-2230

Who would benefit most from this knowledge?

This article would primarily target an existing worker wanting to learn about some missing knowledge gaps in this area.
Someone in a Senior Managers role would need this knowledge.
There is no jurisdiction influence in this area.
There is no cultural influence in this area.
The climate does not impact on this area.
This information would be most relevant to startups, small to medium Enterprises and Corporations.
This knowledge is most relevant to all industries.