Net profit
Encyclopedia
Net profit or net revenue is a measure of the profitability of a venture after accounting for all costs. In a survey of nearly 200 senior marketing managers, 91 percent responded that they found the "net profit" metric very useful. In accounting
, net profit is equal to the gross profit
minus overheads
minus interest
payable for a given time period (usually: accounting period
).
A common synonym for "net profit" when discussing financial statements
(which include a balance sheet
and an income statement
) is the bottom line
. This term results from the traditional appearance of an income statement which shows all allocated revenues and expenses over a specified time period with the resulting summation on the bottom line of the report.
In simplistic terms, net profit is the money left over after paying all the expenses of an endeavor. In practice this can get very complex in large organizations or endeavors. The bookkeeper or accountant
must itemise and allocate revenues and expenses properly to the specific working scope and context in which the term is applied.
Definitions of the term can, however, vary between the UK and US. In the US, net profit is often associated with net income or profit after tax (see table below).
The net profit margin
percentage is a related ratio. This figure is calculated by dividing net profit by revenue or turnover, and it represents profitability, as a percentage.
they are at adding to the corporate net profit.
Net profit is a measure of the fundamental profitability of the venture. It is the revenues of the activity less the costs of the activity. The main complication is when overhead
needs to be allocated across ventures. Almost by definition, overheads are costs that cannot be directly tied to any specific project, product, or division. The classic example would be the cost of headquarters staff. Although it is theoretically possible to calculate profits for any sub-venture, such as a product or region, often the calculations are rendered suspect by the need to allocate overhead costs. Because overhead costs generally don’t come in neat packages, their allocation across ventures is not an exact science.
Example
Here is how you reach net profit on a P&L (Profit & Loss) account:
Accountancy
Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in...
, net profit is equal to the gross profit
Gross profit
In accounting, gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service, before deducting overhead, payroll, taxation, and interest payments...
minus overheads
Overhead (business)
In business, overhead or overhead expense refers to an ongoing expense of operating a business...
minus interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
payable for a given time period (usually: accounting period
Accounting period
An accounting period is a period with reference to which United Kingdom corporation tax is charged. It helps dictate when tax is paid on income and gains...
).
A common synonym for "net profit" when discussing financial statements
Financial statements
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
(which include a balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
and an income statement
Income statement
Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
) is the bottom line
Bottom Line
The Bottom Line was a music venue at 15 West Fourth Street between Mercer Street and Greene Street in the Greenwich Village neighborhood of Manhattan, New York City...
. This term results from the traditional appearance of an income statement which shows all allocated revenues and expenses over a specified time period with the resulting summation on the bottom line of the report.
In simplistic terms, net profit is the money left over after paying all the expenses of an endeavor. In practice this can get very complex in large organizations or endeavors. The bookkeeper or accountant
Accountant
An accountant is a practitioner of accountancy or accounting , which is the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities and others make decisions about allocating resources.The Big Four auditors are the largest...
must itemise and allocate revenues and expenses properly to the specific working scope and context in which the term is applied.
Definitions of the term can, however, vary between the UK and US. In the US, net profit is often associated with net income or profit after tax (see table below).
The net profit margin
Profit margin
Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.Net profit Margin = x100...
percentage is a related ratio. This figure is calculated by dividing net profit by revenue or turnover, and it represents profitability, as a percentage.
Purpose
How does a company decide whether it is successful or not? Probably the most common way is to look at the net profits of the business. Given that companies are collections of projects and markets, individual areas can be judged on how successfulthey are at adding to the corporate net profit.
Construction
Net profit: To calculate net profit for a venture (such as a company, division, or project), subtract all costs, including a fair share of total corporate overheads, from the gross revenues or turnover.- Net profit ($) = Sales revenue ($) - Total costs ($)
Net profit is a measure of the fundamental profitability of the venture. It is the revenues of the activity less the costs of the activity. The main complication is when overhead
Overhead
Overhead may be:* Overhead , the ongoing operating costs of running a business* Engineering overhead, ancillary design features required by a component of a device...
needs to be allocated across ventures. Almost by definition, overheads are costs that cannot be directly tied to any specific project, product, or division. The classic example would be the cost of headquarters staff. Although it is theoretically possible to calculate profits for any sub-venture, such as a product or region, often the calculations are rendered suspect by the need to allocate overhead costs. Because overhead costs generally don’t come in neat packages, their allocation across ventures is not an exact science.
Example
Here is how you reach net profit on a P&L (Profit & Loss) account:
- Sales RevenueRevenueIn business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
= Price (of product) X Quantity Sold - Gross profitGross profitIn accounting, gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service, before deducting overhead, payroll, taxation, and interest payments...
= sales revenue – cost of sales and other direct costs - Operating profit = Gross profit – overheads and other indirect costs
- EBITEarnings before interest and taxesIn accounting and finance, earnings before interest and taxes is a measure of a firm's profit that excludes interest and income tax expenses. Operating income is the difference between operating revenues and operating expenses...
( earnings before interest and taxes)=operating profit + non-operating income - Pretax Profit (EBTEarnings before taxesEarnings before taxes is the money retained by the firm before deducting the money to be paid for taxes. E.B.T includes the money paid for interest. Thus, it can be calculated by subtracting the interest from EBIT ....
, earnings before taxes) = operating profit – one off items and redundancy payments, staff restructuring – interest payable - Net profit = Pre-tax profit – tax
- Retained earningsRetained earningsIn accounting, retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or...
= Profit after tax – Dividends
See also
- RevenueRevenueIn business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
- EBITDA (Earnings before interest, taxes, depreciation and amortization)
- Net incomeNet incomeNet income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings...
- Non-profit organizationNon-profit organizationNonprofit organization is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends...