What is net profit? How to calculate and optimize net profit
Net profit is not only an important measure of business efficiency but also an index reflecting the financial health of a business. Understanding what net profit is, mastering how to calculate and apply net profit optimization methods will help businesses improve operating efficiency and achieve sustainable development. In this article, 1C Vietnam will help businesses clearly understand the formula for calculating net profit as well as how to optimize this index.
1. What is net profit?
Net profit , also known as "Net profit" in English, is the remaining profit after deducting the cost of goods sold and expenses (financial expenses, sales expenses, business management expenses). enterprise) from the enterprise's total revenue. Net profit is also known by other names such as net profit or profit from production and business activities.
2. Correct formula for calculating net profit
Each business or administrator will have different ways of calculating net profit based on available data. Below is the formula for calculating net profit that businesses can refer to:
Net profit from business activities | = | Net revenue | – | Cost of goods sold | + | (Revenue on financial activities – Financial expenses) | – | (Management costs + selling costs) |
In there:
- Net revenue: Total revenue from sales and service provision activities after deducting items such as sales discounts, sales returns and trade discounts.
- Cost of goods sold: All costs to produce a product, including direct materials costs, manufacturing overhead costs, and direct labor costs.
- Financial activity revenue: Income from financial activities such as loan interest, financial lease interest, royalties, dividends and shared profits.
- Financial expenses: Expenses arising from financial activities, such as interest and costs related to financial investments.
Besides, businesses can also use the following shortened net profit formula:
Net profit from business activities | = | Gross profit | – | Financial profits | + | (Management costs + selling costs) |
In there:
Gross profit | = | Net revenue | – | Cost of goods sold |
Financial profits | = | Financial revenue | – | Financial expenses |
3. Formula to calculate net profit margin
Net profit margin ratio is an important indicator to evaluate profitability from revenue in a specific period of time. Net profit margin represents the amount of net profit a business earns from each dollar of revenue. Therefore, businesses always want this index to remain at a high level, at least to ensure that costs are exceeded.
The formula to calculate the specific net profit margin is as follows:
ROS = (Profit after tax/Net revenue) x 100% (unit:%)
In there:
- Net revenue = Actual sales revenue – Business revenue deductions.
- Profit after tax = Profit before tax – Total tax payable + Deferred taxes.
4. What does net profit mean to a business?
Net profit is an important indicator in financial reports, providing information about a business's business results. Calculating net profit can bring many benefits as follows:
- Monitor business performance: Comparing business plans with actual profits helps grasp the operating status of the business. From there, businesses can come up with appropriate management plans based on this profit index.
- Analyze financial statements: Net profit helps business owners and shareholders easily analyze financial statements, thereby making the right decisions.
- Compare business situation: In the same industry, net profit is an important index for investors to evaluate a business. Businesses with high and stable profits often attract many investors.
5. Effective way to optimize net profit
Optimizing net profit is the top goal of every business to ensure sustainable development and competitiveness in the market. Below are some effective strategies and techniques to improve net profit compiled by 1C Vietnam.
5.1 Control costs, ensure revenue>expenditure
To ensure the principle of Revenue - Expenditure > 0 and optimize profits, businesses need to comply with the following specific management principles:
- Manage revenue and expenses strictly, based on accurate estimates and forecasts. Use detailed analysis to understand revenue sources and apply cost-cutting measures effectively.
- Control debt regularly and strictly, establish debt handling policies to avoid the risk of insolvency as well as reduce interest costs.
- Manage inventory effectively, ensuring that inventory does not cause capital congestion and optimize working capital turnover.
- Make detailed financial plans, control cash flow and develop effective debt collection and payment plans.
5.2 Effective cash flow management
To ensure sustainable development, managers need to pay attention to cash flow management. This requires businesses to prepare a detailed cash flow plan, knowing the exact amount of money needed to maintain and develop business operations. Administrators need to clearly identify revenue sources and make strategic decisions about investing or repaying debt effectively.
5.3 Optimize costs with suppliers
Finding ways to negotiate prices and conditions with suppliers to minimize the cost of goods is an important factor. Consider the possibility of strategic cooperation with suppliers to jointly optimize costs and profits, creating a win-win environment for both parties.
5.4 Use professional financial management tools
With the development of technology, professional financial management software is commonly applied with the desire to help businesses maximize net profits. Financial management tools help businesses plan spending more closely.
In fact, businesses often prioritize financial management tools and integrated management software like 1C Company Management instead of just using simple and discrete accounting software. Revenue and expenditure management features of 1C Company Management Software can:
- Cash and bank deposit management: The software allows setting up multiple currencies and multiple cash funds at the same time.
- Revenue and expenditure plan: Businesses can create estimated revenue and expenditure plans to control the implementation of financial obligations as well as schedule payments based on revenue and expenditure documents and the business's cash flow plan.
- Debt management: Software supports recording, checking and analyzing detailed debts with suppliers and customers. At the same time, algorithms also help businesses determine debt age to help control new and old debt.
- Track loans and credit contracts: With 1C Company Management, businesses can track details of loans and debts and automatically calculate the principal and interest amounts that need to be paid each period.
- Calculate principal and interest amounts using many different methods.
6. Instructions for distinguishing between net profit and gross profit
Net profit and gross profit are two different concepts. Businesses can distinguish these indicators through the information below.
Financial indicators | Revenues | Gross profit |
Define | Net profit is the amount of money a business earns after subtracting all other costs and expenses from total revenue during a certain period of time. | The amount of money collected from revenue after deducting the direct costs associated with a product or service including manufacturing, transportation, and selling costs. |
Overall level | Analyze the entire business activities of the enterprise in a certain period or business period. | Calculate the profits associated with each specific product or service. |
Cost level | Calculation is based on all costs of the business. | Only calculate direct costs related to a specific product or service |
Importance | Evaluate the business performance of a business during the entire business period. | Necessary indicators to evaluate the efficiency of production and sales of each product and service in the enterprise. |
Understanding the concept and calculation of net profit helps businesses grasp the actual financial situation, thereby providing optimal measures to increase profits. Optimizing net profit requires businesses to carefully analyze costs, effectively manage resources and constantly improve business processes. Hopefully the article on 1C Vietnam has helped your businesses gain more useful knowledge to apply in practice.