How to calculate your business’s net profit?

What is net profit?

Net earnings is a monetary indicator that pertains to the coins generation as a consequence of the operation of a commercial enterprise. It is received from the difference among the organization’s total sales (the whole thing it received) and its general prices.

In this way, net profit analyzes everything that the business actually earned. In other words, what money is left for the company , after deductions for expenses, costs to maintain the operation and taxes.

Costs are all direct expenses related to the production of the business , such as the salaries of production employees and the costs of raw materials. Expenses are all other expenses that are not directly linked to the services or products offered, such as electricity bills, internet, commissions, etc.

How important is this indicator for my business?

You’ve already seen that net income is vital for analyzing the financial fitness or fulfillment of a commercial enterprise. This indicator lets in you to realize how your money owed are doing and makes it simpler to decide, for instance, on investments for business growth.

A good net profit also helps to maintain a positive cash flow . After all, the data allows you to see whether the company is making enough profit to maintain or grow. On the contrary, if it is experiencing losses or constant reductions in profit, it may mean that its management is not appropriate.

Given this result, you can reorganize your business’ finances and make more strategic decisions. If you notice negative performance, one solution may be to reduce costs and expenses or change the prices of your services and products .

Knowing your profit, you can still build an emergency fund or plan improvements for your business. Hiring more employees, purchasing new products or renovating your business are some possibilities.

With a good level of profit, there is more financial organization and there is no need to resort to loans. Your company will also have greater security in times of crisis. That is why it is so important that the net profit of your business is calculated and managed correctly.

How to calculate net profit?

To correctly calculate net profit, all fixed and variable expenses must be identified. In practice, the formula is described as follows:

Net Profit = Total Revenue – Costs – Expenses (fixed and variable)

So, to calculate this, you must take the total revenue (monthly income) and subtract the costs and expenses (fixed and variable). Examples of expenses and costs of a company’s operations are:

• employee salary;
• commissions;
• payment of suppliers;
• rent;
• raw material costs;
• insurance;
• taxes;
• energy, cell phone, internet, water bills, etc.;
• employee benefits;
• credit card fees;
• partners’ pro-labore;
• marketing;

Although the calculation is not complicated, there is a lot of information considered in the formula. Therefore, it is necessary to regularly monitor your cash flow to help analyze the identifier.

With this care, you will be able to better manage your company’s finances and make effective decisions. One tip to help with this process is to rely on technology, using a system to facilitate financial control.

How to interpret the results obtained from this indicator?

Now you know how to calculate net profit and how important it is for managing your business. But how do you interpret the result? First, you need to make sure you are using reliable data in the formula.

It is necessary to record and control all movements in your cash flow, as this is the only way to obtain accurate results. Otherwise, the net profit result will not be realistic, which could cause numerous problems for management.

Keep in mind that making decisions based on false results can lead to wrong choices. For example, the company could appear to have a healthy budget when, in reality, it is running at a loss. This flaw in the analysis would affect management and could cause problems for the business.

In addition to using reliable data, you must know how to interpret the results obtained from the calculation. To do this, it is worth considering the entire context, such as the current market situation, results from other periods, internal changes, among other factors.

From this, you will be able to analyze the net profit in a broader way to draw conclusions about the results. In this process, it is valid to use other financial indicators of prices, revenue, debts, etc.