For any large or small company, it is necessary to have a balance that allows you to know the state of your finances, your assets and the cost effectiveness of its operations among other aspects. That will serve your managers for the decision making at the time of investing the resources they have for a certain moment or year.
In this sense, an indicator that represents a lot of interest and that is very useful is the net profit, which in its simplest expression is the money owned by the company after covering all its commitments, understood as payments, operating expenses and payment of taxes.
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In this article you will find:
What is the net profit?
The net profit business in a cycle or operating year, it is an indicator obtained by subtracting from the total income of the company, all the expenses that it makes during that evaluated period.
This term, in accounting, indicates the difference that is generated between income and total expenses, the net profit is also called Result of the excersice.
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In general, this benefit allows the company to somehow evaluate its operation, decide between opportune investments and improve profitability.
There are different criteria to evaluate this measure linked to various variables.
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In short, the net profit is the money that the company has after meeting its commitments.
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How Net Profit Is Calculated
To carry out this calculation, a formula is used, quite simple:
Net profit = Gross profit - Taxes - Interest - Depreciation - Overhead
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The expenses include different payments made by the company for its operation, the payment of rents, cancellation of services, purchases of raw material, supplies and / or equipment for example computers, office supplies, also including administrative expenses, for example; the payment to the personnel, whether administrative or plant worker.
If we proceed to express this measure in percentage form, we then speak of cost effectiveness or net profit margin, which expresses how much the company earns for each monetary unit that it sells, that is, how much profit it generates from the activity that said company carries out.
This measure is calculated from the following formula:
Net profit margin = Net profit / Sales
Difference between net profit and gross profit
The gross profit, also refers to the measurement of a company's income, before complying with existing payments or commitments, in some cases it can be positive and in others it can be negative.
Its main difference with respect to net profit is that, in this case, the payments made by the company have been subtracted, so the net profit It is a result that is obtained after knowing the gross profit.
The relationship between net and gross profit is obtained with the formula already described in which the gross profit is subtracted from the general expenses, the depreciation taxes and interest, to obtain the net benefit.
How is the average or average net profit calculated?
For this calculation, you must know all the income of the organization, and then subtract all those expenses made and the debts that are owned, then it is proceeded to divide it by the number of months of the fiscal year or period in question.
To carry out this calculation, two methods are mainly used, in the first, from the knowledge of the gross income, from which the the general expense of the company, those goods that were sold are included in income and expenses and in the expenses the interests that are owed to pay.
The other methodology involves knowing the total or gross profit and deducting from it the payment of expenses.
Average net profit = Net profit / number of months
What is the Importance of the net profit?
As we have mentioned, the net profit is an indicator, this measure quantifies how the investments made by the personnel that make up the organization return. Knowing it is very useful and requires that you have a meticulous detail and record of all operations, both income and expenses.
When this measure is informed, it allows the interested party, either the president or the partners of the company, to know how much money they earn from their investment, while this measure is higher in general the conditions of the company are top.
The net profit allows you to decide if there is potential for the operation of the company, make projections and if it should there is continuity in the evaluated activity or on the contrary, corrective measures must be taken to improve said balance.
What factors affect the net profit?
There are several factors that can affect the net profit, these must be carefully monitored by the personnel in charge of the finances of the company, some of these factors They are:
- Changes in sales movements, which can be affected both by economic factors, loss of purchasing power, inflation, as by natural factors, example the climate. It is very important to make periodic observations and know the existing competition in the market, evaluate advertising campaigns among other considerations.
- Variations in the price of raw materials, which undoubtedly affect production costs, the discontinuity in their supply and their impact on production.
- Human resources, labor and their costs.
- Inventory management, acquisition and use of the material used for manufacturing, the method used for its rotation, FIFO method first in first out, price of materials purchased on older dates than usual. are generally lower, this among other aspects related to inventory will affect the margins of utility.
Finally, the net profit, is a term that must be understood and applied correctly at the financial level of a company. It is important to know the differences between benefits, net income and net income, in this case it refers to all income received or generated.
With respect to the net profit, it is understood that the corresponding expenses for the operation of the organization and the pertinent taxes have already been subtracted from the net or gross income.
