Net profit is an important financial metric for all businesses. Regardless of what type of goods or services your business sells, you’ll need to track its net profit. Net profit, however, isn’t the same as gross profit. It’s a unique financial metric that offers an accurate look at your business’s overall profitability. For a better understanding of net profit, including how to calculate it, keep reading.
What Is Net Profit?
Net profit refers to how much money your business generates during a given period after paying for all its expenses and other costs. It’s also known as “bottom line.” With net profit, you can see how much money your business profited. It takes into account your business’s revenue as well as your business’s expenses and other costs.
You can calculate your business’s net profit for a given period by adding up all of its revenue and substrating it by all of its expenses and other costs for that period. If your business generated $100,000 last month and its expenses were $30,000, its net profit for that month would be $70,000.
Why Net Profit Is Important
Net profit is important because it provides insight into profitability. There are other financial metrics available. Many of them, however, only look at revenue and not expenses.
Generating revenue is undoubtedly important. You can’t run a successful business without generating revenue. With that said, high expenses and related costs can counter the otherwise positive benefits of high revenue. If your business’s expenses surpass its revenue, it won’t generate profits. Your business will essentially burn money until its revenue increases and/or its expenses decrease. With new profit, you can gauge your business’s profitability. Net profit will reveal whether your business is truly making a profit. It will also reveal how much profit your business is making.
What About Gross Profit?
Contrary to common belief, net profit isn’t the same as gross profit. Gross profit is a different financial metric. While gross profit still takes into account your business’s revenue, it doesn’t include all of your business’s revenue.
Gross profit reflects your business’s revenue for a given period minus its cost of goods sold. Cost of goods sold is just one type of expense. There are many other expenses that your business will likely incur. For a complete view of your business’s financial health, you should calculate its net profit.
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