Net profit formula - calculation

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

For any businessman or individual entrepreneur, profit is important. This is the result, which is at the same time the reason for opening any business. Without profit, activities aimed at generating income do not make sense. To successfully promote their product in the economic market, manufacturers need to analyze, plan and monitor many indicators. Ignorance of the coefficients that affect the company's development prospects can lead to negative results. One of the factors demonstrating the success of the company is the net profit indicator. The timeliness of payment of wages to employees, the income of managers, the creation of a fund to solve the financial problems of the enterprise depend on it. To calculate the indicator, the net profit formula is used. After reading the article, everyone will be able to understand what this coefficient is and how to find it.

Definition

Net profit is a component of the firm's balance sheet profit, remaining at its disposal after the final payment of allmandatory contributions (taxes, cash deductions, fees). This is the most important economic indicator of the enterprise, reflecting the performance of all structural divisions of the organization. It should not be confused with the phrase "economic profit". This factor is the result of the company's activities for the entire reporting period. Thanks to the result that the net profit formula produces when calculating, it is possible to calculate coefficients expressing profitability, financial stability, and liquidity. This factor is used when approving methods that allow assessing such conditions as bankruptcy, credit and solvency, as well as investment attractiveness.

For whom is net profit important

Investors use this indicator to determine the company's profitability, as well as its ability to generate financial flows. Thanks to net income, creditors can determine the rate of economic reliability of the company and its ability to pay obligations. This factor also affects the value of the enterprise, which is very important for managers and owners. Based on the net profit indicator, suppliers determine the ability to make payments for the provided materials and components on time. Managers also use the term "net income". The calculation formula is used to obtain the number necessary to determine the coefficients of sustainability of the enterprise, the possibility for the development of innovative technologies and the renewal of production assets.

Factors affectingper indicator

The main source of capital gains is net income. The calculation formula makes it possible to obtain a coefficient, based on which the owners determine the dividend and investment policy subsequently pursued by the enterprise, taking into account the prospects for its development. This indicator depends on the volume of sales proceeds, the level of cost, the financial results of ordinary work, the amount of income tax and other obligatory payments.

Realization of net profit

These funds are used to upgrade production assets, create inventories, improve the skills of workers, develop innovative technologies, create reserves, charity, external and internal investments, and calculate shareholder dividends.

Net profit analysis

It allows you to determine the overall dynamics and nature of the periodic change in the efficiency of the enterprise. Net income is characterized by volatility and seasonality. There is a strong correlation between several important indicators. These data include the dynamics of net profit, sales revenue and net assets of the enterprise.

The credit rating of companies can be classified as investment grade. When determining estimates, the formula for net profit on the balance sheet is used. This rating allows you to effectively attract the flow of funds from foreign investors.

Calculation of net profit: formula

This indicator is equal to the balance of gross profit aftermaking all necessary payments (taxes, fees). A certain period of time (year, quarter) is taken for the period under study.

So, the result of summing financial, gross and operating profits, followed by the deduction of taxes, forms a coefficient. This is the net profit. The calculation formula can be simplified. The indicator will be equal to the difference between profit before tax and the amount of mandatory payments. Form No. 2 is used to record the result obtained. The indicator indicated in line 190 of the income statement is used in further determining the prospects for the development of the company.

Calculation algorithm

First you need to determine the required reporting period, for which you should sum up. The numbers are taken only for the selected time, otherwise the result will be displayed incorrectly. Before your eyes should be a formula for net profit. To determine the indicator, information is required on financial, gross, operating profit and the amount of taxes.

Calculation procedure

First you need to determine the amount of gross receipts. This is the amount of revenue from services provided or goods sold.

Next, you need to calculate the net gross receipts. This is the amount of income from which the amount of bonuses given to customers is deducted, as well as funds returned to consumers in case of refusal of the received product or service.

Follow-up to determine the net profit of the enterprise

Then you need to calculate the total cost of manufacturing products. This amount is included in the cost. This includes the cost of providing services.

The next step is to analyze the gross margin. To do this, subtract the cost of the product from the net income defined in the second paragraph.

Finally, you can calculate the net profit. The formula will allow you to get a result that can be used in the further analysis of other coefficients. To obtain a figure from gross profit, subtract operating expenses and other mandatory contributions. We are talking about paying fines, loans, taxes and deductions.

International Standards

Thanks to numerous studies conducted by world economists, the minimum coefficient was calculated, which allows you to get the net profit formula. It is equal to 14%. If the indicator is less than the specified figure, then the enterprise is considered unprofitable, despite the size of the total income. When the coefficient is reached, the company begins to develop, and the activity becomes profitable.

A specific example of determining the net profit of an enterprise

First, income and expenses are calculated. After that, you can begin to determine the indicator of net profit (or loss) from the operation of the enterprise. Expenses associated with business activities are deducted from business income. The resulting number can be both a loss and a net profit. The formula for the balance of income and expenses will allow you to determine the difference between them. The resulting number can be positive. Then the result is written asnet profit. The formula also allows you to calculate losses. When expenses exceed income, the difference becomes negative. The result is then recorded as a net loss. If the owner owns several enterprises, the calculation is carried out for each of them separately.

Determining profitability

This is an indicator of the economic efficiency of the enterprise, showing what part of the organization's income is profit. It has many different variations. The most commonly mentioned return on sales in terms of gross and net profit. This indicator informs the entrepreneur about the level of effectiveness of the use of various means. These include material, labor, monetary and other resources. When the calculation of net profit begins, profitability and loss are necessarily mentioned. The second criterion is an indicator that most accurately reflects the difference in income and losses from the payment of fines, pen alties, forfeits, etc.

ROI

It is calculated as the ratio of previously determined net profit to all resources and assets included in its composition. In order to get the result as a percentage, you need to multiply the coefficient by 100%. There is a profitability of gross, net and operating profit; current, non-current and other assets; own capital. The first 3 indicators demonstrate the economic efficiency of turnover during the sale of products.

Net profit margin formula

This ratio is an indicator of the share of net profit in a specific sales volume. Several numbers can be used to determine net profit margin. The calculation formula is not that complicated. To determine the coefficient, the data specified in the form No. 2 of the income statement is sufficient.

The profitability ratio is calculated as follows: it is the ratio of net profit to total revenue. The minimum value of the result obtained is determined by the industry and other features of the organization's activities. With the same economic performance of several institutions, the profitability of enterprises with a long production cycle will be higher.

Notes

It is worth noting that this indicator demonstrates the profitability or unprofitability of the activities of an existing organization, but is not a solution to the question of how profitable investments in its work are. In order to make a decision on this issue, you should calculate the return on assets and capital.