Net profit is the amount of money a company makes after deducting all of its expenses, such as taxes, interest, and other fees, from its total revenue.
Net Profit = Total Revenue − (Total Expenses + Taxes + Interest)
Net profit is the amount of money a company makes after deducting all of its expenses, such as taxes, interest, and other fees, from its total revenue. It indicates how much money the company earned over a specific time period. It is also known as the bottom line, net income, or net earnings.
Financial Health Indicator: This measures the company's overall profitability and financial health.
Decision-Making: It enables investors and business owners to assess success and make informed decisions.
Attracting investors: A bigger net profit can attract investors looking for profitable enterprises.
Growth Planning: Growth planning enables organizations to determine how to expand, acquire other businesses, or make adjustments.
To calculate Net Profit, use the following formula:
Net profit is calculated as the difference between total sales and total costs, taxes, and interest.
Net Profit = Total Revenue − (Total Expenses + Taxes + Interest)
Another possibility would be:
Net Profit = Gross Profit − Operating Expenses − Taxes − Interest
Assume that a business has the following financial information for a year:
Total Revenue: ₹50 lakh, Cost of Goods Sold (COGS): ₹20 lakh, Operating Expenses: ₹10 lakh, Taxes: ₹5 lakh and Interest: ₹2 lakh
Gross Profit = Total Revenue − COGS =50−20=₹30 lakh
Net Profit = Gross Profit − (Operating Expenses + Taxes + Interest) =30 - (10+5+2) =13 lakh
The Net Profit Margin is a financial ratio that indicates the percentage of revenue that remains as net profit after all expenses.
Net Profit Margin = (Net Profit / Total Revenue) × 100
Using the example above:
Net Profit Margin = (13/50) × 100 =26%
Aspect | Net Profit | Gross Profit |
---|---|---|
Definition | Profit after all expenses, taxes, and interest. | Revenue minus the Cost of Goods Sold (COGS). |
Includes | Operating Expenses, Taxes, Interest, etc. | Only Direct Costs like materials and labor. |
Significance | Indicates overall profitability. | Measures core business profitability. |