Concept and meaning of net profit
Net profit is also known as net profit. This is the profit that a business earns after deducting all costs and other expenses from revenue. These expenses include: cost of goods sold, selling expenses, business management expenses, taxes and other expenses incurred during the financial reporting period.
Net profit is an indicator to evaluate the business performance of an enterprise.
Net profit is an extremely important indicator. Because it plays a role in reflecting the ability to generate profits from a company's core business activities. This indicator shows the level of efficiency in cost management and profit optimization. Businesses will rely on this indicator to manage the level of cost efficiency, thereby optimizing the generated profits.
Net profit formula
How to calculate net profit: Net profit = Net revenue – Cost of goods sold + (Financial revenue – Financial expenses) – (Cost of sales + Business management expenses)
In there:
- Net revenue: Is the actual revenue earned from sales and service provision activities after deducting revenue deductions. These include: sales discounts, sales returns, trade discounts...
- Cost of goods sold: Is the total cost used for the entire product manufacturing process. They include: direct material costs, direct labor costs, and general manufacturing costs.
- Financial revenue: These are expenses related to financial activities such as: bank loan interest, financial lease interest, royalties, dividends,...
- Financial costs: Are the costs that a business must pay for financial activities. They include costs related to borrowing capital and other financial transactions.
Formula to guide how to calculate net profit
How to distinguish between net profit and gross profit
Net profit and gross profit are two concepts that are often confused by many people. Below is a comparison table and analysis of the differences between these two important indicators.
|
Net profit |
Gross profit |
|
|
Define |
Is the amount of money remaining after deducting all expenses related to the business in a given period of time. |
Is the amount of money remaining after subtracting all costs associated with a product or service (including manufacturing costs, shipping costs, and selling costs). |
|
Cost level |
Analyze and evaluate all types of business costs, including direct and indirect costs. |
Only count costs directly related to the product or service. |
|
Overall level |
Measure and evaluate the business performance of an enterprise in a given reporting period. |
Only calculate the profit margin related to each individual product or service. |
|
Importance |
Is the most important indicator to help evaluate the business performance of an enterprise. |
Is an important indicator to evaluate the efficiency of production and business activities on each product or service of the enterprise. |
How to calculate net profit ratio and illustrative examples
Net Profit Margin is an indicator that reflects the profitability of a business. This indicator shows the amount of net profit that a business earns from each dollar of revenue.
Formula for calculating net profit margin:
ROS = (Profit after tax / Net revenue) x 100% (unit: %)
In there:
- Net revenue = Actual sales revenue – Sales deductions (discounts, sales returns, trade discounts, etc.)
- Profit after tax = Profit before tax – Total tax payable + Deferred taxes.
Example to illustrate how to calculate net profit margin
Principles of optimizing profits from effective business operations
To optimize net profit from business operations, businesses need to follow the following principles.
Tight cost control
Businesses need to carefully analyze and manage expenses to identify those that can be cut or optimized. It is necessary to ensure that these measures help save costs while still ensuring the quality of products and services.
Tight cost control is an effective way to optimize net profit.
Some optimization measures include finding cheaper sources of supply, applying advanced technology to improve production efficiency, optimizing work processes, etc. Businesses need to regularly monitor and evaluate these costs to make appropriate adjustments.
Maximize revenue
In addition to controlling costs, businesses also need to try to find ways to increase revenue. This can be achieved by applying strategies to expand production, develop new products or expand markets, etc. However, businesses need to analyze and consider carefully to avoid causing financial risks that are difficult to control.
Cash flow management
It is very important to pay attention to effective cash flow management. Businesses need to prepare a detailed cash flow plan to know exactly how much money is needed for business and investment activities. From there, businesses can make decisions about investment or debt repayment effectively.
Businesses need to focus on cash flow management to optimize net profit.
Use management tools
Businesses can also take advantage of management tools to manage finances and spending plans more closely. For example, financial management software will allow businesses to track expenses in detail. From there, businesses can identify unnecessary expenses and save costs. These tools also help businesses plan spending in accordance with the current financial situation.
There are many management tools to help businesses manage financial activities effectively.
In addition, there are a number of other management tools such as warehouse management software, production management also play an important role. They will help optimize the production process and minimize waste, thereby optimizing net profit for the business.
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