Sales are an indicator of the success of your business. However, there is a more important measurement to consider - net profit - Net Profit. However, what is Net Profit? Let's find out with Giaiphapdonggoi.net!
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1. What is net profit?
Net profit - net profit is a measurement of a company's profit after all operating expenses, taxes, interest and depreciation have been subtracted from the company's total revenue. This term is often referred to as a company's "final profit" and can also be described as "net earnings" or "net income".
What is net profit?
Profit is simply the amount of revenue a company has left over after expenses. More specifically, however, net profit is a number that represents a particular type of profit. Net profit, or net income, is the well-known bottom line on a company's financial statements.
You will often see this term appear on reports relating to the financial performance of listed companies. Investors can use it to find out how well a particular company has performed over a certain period of time.
Net profit is a calculation that is most important to traders and investors when looking at a company's profitability. It is also used to calculate the earnings of publicly traded companies per share.
2. Meaning and things you need to know about Net profit
You can calculate a company's net profit by reading its income statement and applying the following very basic calculation:
Total revenue - total cost = net profit
When a company's total revenue has been considered, across all income streams, net profit is achieved by subtracting all expenses for a given period. This simple calculation must consider all the money flowing in and out of the company.
Meaning and things you need to know about Net profit
If a company's fees and expenses are greater than its revenue, it is considered a net loss, not a net profit.
A variety of factors can affect a company's net profit. For example, inadequate financial management, declining sales, and poor customer service can all lead to weak profits or losses.
Net profit margin
Net profit margin is a measure or net profit (net income) as a percentage of a company's sales. In other words, net profit margin is the ratio of net income to sales of a given company. Net profit margin is usually expressed as a percentage but can also be in decimal form.
Calculate net profit margin
Net profit margin can be calculated by subtracting COGS, operating expenses, interest and taxes payable from sales to determine net profit. Then divide net profit by sales to get the decimal form of the net profit margin. This can then be expressed as a percentage.
Net profit margin looks at a company's total revenue and outflows including debt payments.
3. When to use and avoid using Net profit?
When to use and avoid using Net profit?
When to use net profit?
Shareholders can view net profit when the company releases its earnings report each fiscal quarter. Net profit is important because it is the source of compensation for the company's shareholders. If a company cannot generate enough profits to compensate its owners, the value of the stock will plummet. If a company is doing well and growing (with rising profits), the stock price will be higher.
Since changes in net profit are always scrutinized, companies will always look for ways to improve their net profit, either by increasing sales or by cutting costs.
Generally, when a company's net profit is low or negative, a multitude of problems can be blamed. These range from reduced sales to poor customer experience to substandard cost management.
When to avoid using net profit
Net profit varies widely across industries so it shouldn't be used to compare companies. In these cases, it is more appropriate to consider net profit as a percentage of sales.
Net profit should also not be used as a measure of how much cash a company earns over a given period of time. That's because the net profit formula takes into account non-cash expenses like depreciation.
Note: To see how much cash a company generates, check the cash flow statement.
4. Reasons why net profit matters
This is not the only reason why net profit is important as other groups are also interested in the net profit of your business. This includes:
Reasons why net profit is important
Revenue - to calculate the amount of tax you have to pay.
Banks and other creditors - banks and other organizations that lend to businesses use the net profit figure to better understand the business and to assess loan suitability. In particular, net profit will tell them your ability to pay.
Competitors - if you are a limited company, your competitors will be able to access your net profit by analyzing the profit that you have to pay to the tax authorities. This will help them better understand your business and how successful it is.
Investors and Shareholders - Net Profit - net profit is very important if you are looking to invest in your business or if you have shareholders. A stable and healthy net profit figure will give investors confidence that they will make a profit.
5. How to improve net profit
Lower your total costs - reducing your overall costs can help you reduce your costs one-time or ongoing, depending on the total cost. For example, save on phone bills, travel costs, employee salaries, etc.
Reduce COGS – this includes things like negotiating better prices with suppliers, making manufacturing processes more efficient, outsourcing and more.
Increase sales volume - to spread costs in your business as far as possible.
Above, Giaiphapdonggoi.net has shared with you useful information about what Net Profit is. This is one of the indicators that helps to study the situation and make a decision whether to reinvest or not. Even based on this index, the company can easily borrow capital to continue implementing other business strategies.
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