As a whole, profit refers to how much your business makes once you subtract expenses. However, as you review your income statement and other financial documents, you may notice different profit terms with varied numbers. This guide will better help you understand net profit, how it is calculated, and how it is used in your business.
What Is Net Profit?
Net profit refers to your company’s net sales minus your business expenses. This might seem like a basic accounting term, but business owners need to track and understand net profit to help make better strategic decisions.
Net sales refer to your gross sales with any discounts, refunds, or allowances subtracted. This gives you a more accurate number of the amount of money your business brought in.
Your business expenses include everything from your cost of goods sold (COGS) to your operating expenses and overhead. They cover all costs related to operating your business.
How Do You Calculate Net Profit?
The formula for net profit is simple:
Net Sales – Expenses = Net Profit
While the formula itself is easy, it can be cumbersome tracking expenses effectively and recording sales numbers accurately. However, using a resource like the Sunrise app can help mitigate a lot of the headaches that come with tracking business finances.
Where Can You Find Your Net Profit?
Your net profit is often found at the bottom of your income statement. The statement starts with your total revenue and then calculates your net sales. Next, the income statement deducts your COGS and then your overhead expenses. The result is your net profit, the last number associated with your income.
Business owners often pull their income statements monthly, though some review them quarterly and annually with investors.
What Is the Difference Between Gross Profit and Net Profit?
While net profit looks at all of your expenses, gross profit only subtracts the cost of goods sold.
Net profit is considered a valuable metric because it provides a clear view of how much money a company is making. At the end of the day, the profitability of your business is key to its success. However, your gross profit allows you to take a step back and understand why your business is (or isn’t) profitable.
By comparing your gross profit and net profit, you can see if your company is burdened by overhead or if the products themselves need to be more profitable. For example, a company may decide that it needs to move to a more affordable location if rent costs are cutting into the net profit.
Both of these metrics bring value to the income statement.
Use the Sunrise App to Better Track Your Net Profit
Understanding your net profit and how it differs from other reported revenue can help you make smart decisions for your business. You can learn whether you have the budget for additional investments and if you need to make changes to become more profitable.
The Sunrise app can help you pull together financial documents like your income statement so you can track your net profit. This free tool aids business owners in sending invoices, pulling expense sheets, and generally managing the bookkeeping. Check out this app today and learn how it can help you.