Net Profit
Net profit, also referred to as net income or bottom line, is a key profitability metric for a company. It represents the amount of revenue that remains as profit for a company after all expenses, costs, taxes, and other deductions have been subtracted from total revenue.
The formula to calculate net profit is:
Net Profit = Total Revenue – Total Expenses
Total revenue includes all the income earned by a business from its normal operations, including sales of goods or services, interest on investments, rental income, and more.
Total expenses include all costs incurred in the course of business, such as cost of goods sold (COGS), operating expenses (like rent, salaries, utilities), interest on debt, taxes, and more.
Net profit gives a clear picture of the overall profitability of a company. A positive net profit indicates that a company’s revenue exceeded its expenses, resulting in a profit. A negative net profit, on the other hand, indicates that the company’s expenses exceeded its revenue, resulting in a loss.
It’s important to note that net profit doesn’t represent the total cash available to a company, as it includes non-cash expenses like depreciation and amortization.
Example of Net Profit
Suppose a company, ABC Enterprises, has the following financials for a fiscal year:
- Total revenue: $500,000 This could be from sales of goods or services, interest on investments, etc.
- Cost of goods sold (COGS): $200,000 This is the direct costs attributable to the production of the goods sold.
- Operating expenses: $100,000 This includes rent, utilities, salaries, office supplies, etc.
- Interest expense: $10,000 This is the interest paid on any business loans or debts.
- Taxes: $50,000 This is the amount of tax paid by the company.
Now, we can calculate net profit as follows:
Net Profit = Total Revenue – COGS – Operating Expenses – Interest Expense – Taxes
Therefore, for ABC Enterprises:
Net Profit = $500,000 – $200,000 – $100,000 – $10,000 – $50,000 = $140,000
So, ABC Enterprises’ net profit for the fiscal year is $140,000. This is the amount of revenue that remains after deducting all the expenses, costs, interest, and taxes from its total revenue.
