Wondering how to calculate how much money you’ve made?
Net profit is a critical figure for any business, from new sole traders to shareholders of major international companies. Net profit directly shows how successful a business is month-to-month.
Discover everything you need to know about net profit in this article, including:
- How to calculate net profit
- What is net profit used for
- How to improve your net profit
- How Countingup can help you manage your business finances better
How to calculate net profit
Net profit is the money you make after all of your expenses.
The net profit calculation is very straightforward: take the total income you made in a period of time (say, a week or a month), and subtract all of the costs during this same period. Make sure your costs include things like the cost of goods, operating expenses, taxes, and debt payments. Below is a simple formula to use:
Net profit = total income – total expenses
If your business offers a product, you can separate your costs further. By including additional expenses with your cost of goods, you calculate net profit. However, you can calculate your gross profit (just the profit made per unit sale of your product) by only subtracting your cost of goods from your total income. Read more about different types of profit in our article Difference between gross and net profit.
Your net profit figure can be negative. This means your expenses are larger than your income. Negative net profits are common for businesses as they get started and can last until their second year. We’ll discuss what you can do to fix this in the sections below.
What is net profit used for?
Business owners use net profit to plan how to grow their business or enjoy the money they’ve made. Because net profit takes account of all your expenses, you can choose what to do with it: reinvesting back into your business or using some (or all) to spend on yourself and your living costs.
Net profits also allow you to understand how successful your business is as you’ll see how close or far you are away from making no money. If your profits are negative or very small, you’ll have a financial record of where you spend money and what you did to learn from in the future. Over time, as you’re making money, you can use this same record to understand how different choices impact your take-home figure and what works best for your business.
If you’re starting out in business, net profit can also be expressed as a percentage (called net profit margin). However, working with your net profits in pounds and pence can be easier as you’ll be more familiar with other costs to your business in this format.
Finally, net profit figures provide essential information to investors and lenders as they show how well you’ll be able to finance debt or return investment. For this reason, having confidence in your business’ operations and knowledge of its net profit figures is vital for new business owners.
How to improve your net profit
Increasing your net profits can be done in two ways (and you can do both at the same time): increasing revenue (for example, selling more units, increasing prices, etc.) or decreasing expenses (as in cutting operational costs, finding cheaper suppliers, etc.).
Because there are multiple options for each strategy, you’ll know which are more suitable for your business. As you’re looking to choose, we’ve included common factors to consider:
- Invest at earlier stages to gain more long-term. It’s tempting to take the money you make at the early stages and enjoy it. Unfortunately, your budget during this period will be very tight, therefore reinvesting profits back into your business can help you out more in the future. This question of short or long-term gain will be an ongoing debate as you run your business. However, investment at earlier stages can be more impactful and this question is most important while you’re trying to get established.
- Make effective investments. As you’re trying new strategies and making growth decisions for your business, consider the level of necessity, risk and reward in each option you have. Only time will tell which choices are rewarding versus damaging. However, understanding the outcomes of the decisions you make is essential to growing your net profit margins. The future is uncertain and you will make mistakes, but you can get better, so learn as much as you can from your risks.
- Cut costs where you can. Maximising your net profits can be more easily done by cutting expenses. By regularly checking your account records, you’ll be able to identify expenses you can reduce easily versus those you can’t. Understanding and using these differences can help you save money and increase your net profits no matter what stage you’re at.
- Think long-term. Depending on your industry, cutting costs may not work as well if your business model is only profitable at a certain scale. If your business is in this situation, investing in more long-term strategies will be more effective. By acquiring debt or investment, you can expand your business to the size it needs to be profitable – rather than cut necessary costs.
Keep on top of your financial admin with a simple app
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