Data Analytics

What Is Net Profit and How Do You Calculate It?

Net profit represents the truth - how much money you’re left with at the end of the day once you subtract your expenses. Creating a consistent net profit each month can indicate sustainable business growth and it will help you save for future expenses. If you’re an ecommerce store, calculating your online store’s net profit is one of the best ways to measure success.

How does that relate to automated data analytics? Think about it this way, when you are looking to improve your average order value (AOV) or digging into how you can calculate and improve your customer lifetime value (CLV), this is all in service of maximizing your net profit.

What Is Net Profit?

"Net profit" is a formal term for describing your business's bottom line. At a high level, you can think of net profit as the net earnings or amount of money money your business makes compared to how much you spend. Financial pros usually describe net profit as a percentage.

Why Is Net Profit Important?

Net profit is not only important—it's a requirement if you plan to stay in business. Your net profit margin gives you insight into your overall profit. Examining this percentage can provide you with insight into expenses like your overhead.

It's essential to keep thorough records each quarter. If you need to apply for financing at some point, you'll need to produce a profit-and-loss statement that shows the flow of money in and out of your business (your cash flow). It's also essential to have a handle on your business's health so you can make smart decisions.

How to Calculate Net Profit

You can determine your net profit in three steps:

  1. Calculate total revenue. If you're unsure about this figure, you can multiply the number of goods you've sold by their price to get a rough estimate.
  2. Calculate total expenses.
  3. Subtract total expenses from total revenue.

Expressed as a formula: net profit = total revenue - total expenses.

When calculating net profit, a business owner considers every expense related to running the business. Business expenses and direct costs include things like:

  • Rent (overhead costs)
  • Cost of goods sold (COGS)
  • Advertising
  • Taxes
  • Inventory
  • Utilities
  • Labor
  • Production Costs
  • Operating expenses
  • Operating costs

On the other side of the equation, business owners consider the total amount of income the company makes, including income unrelated to the products they sell. Income includes things like:

  • Customer purchases
  • Interest earned on investments
  • Operating profits from selling items the business owns

Net Profit Margin

Your net profit margin reflects the amount of profit the company makes from its total revenue. Profit margin gives you more information about your company's finances than net profit on its own. The net profit margin percentage is calculated by dividing net profit by your total revenue and then multiplying the result by 100.

Expressed as a formula: net profit margin = ( net profit / total revenue ) x 100.

Net profit margin gives you a better look at how your total sales revenue is impacting your business. It is the true measure of a company that helps business owners understand their company's performance and overall valuation. It may even behoove you to use a friendly profit margin calculator to help you financial metrics.

Similar to net profit margin, it is important to understand your company's gross profit margin, which is simply your total revenue minus your costs of goods sold (which accounts for the direct costs of production).

How to Improve Your Company's Net Profit

Most business owners are always working toward higher net profits and net profit margins. Even if you haven't thought about it in these terms, there's a good chance you've been making decisions based on achieving the highest return possible when you deliver your goods or services.

There are many techniques you can use to improve your net profit. Generally, you can generate more profit by reducing costs—the idea is to turn each product or good you sell into a profitable investment.

With a concerted efforts in reducing costs and focus on increasing gross income, you can improve your company's profitability over a given period of time.

Ditch Unprofitable Goods and Services

Do you keep paying for products and services that don't deliver a profit? Carefully consider the actual value of your inventory and service offerings.

Each time you invest in an unprofitable offering, you miss out on potential revenue from alternative products and services. If you maintain an inventory, unprofitable items take up valuable shelf space.

Be ruthless. If a product or service isn't bringing in revenue directly or indirectly, try to focus more on products or services that turn a profit.

Reduce Expenses

It may seem obvious, but the lower your expenses, the higher your potential net profit. One of the most impactful places to start is by comparing your overhead to your competitors. For example:

  • Are you leasing expensive warehouse space that might be cheaper in a less desirable location?
  • Are you hiring too many temporary workers during the busy holiday season?
  • Can you find a better rate for utilities like gas and electricity?

When you reduce several small expenses, it can make a big difference in your bottom line.

Lower Your Costs

Costs are similar to expenses, but they aren't as directly related to overhead. Costs include deals with suppliers and vendors who set prices for the supplies you need to run your business.

Take a look at your supplies and trim any excess. For example, if you have a standing order for office supplies, make sure you aren't over-ordering.

You may be able to renegotiate your contracts with long-time suppliers and vendors, which will also help drive down costs.

Start Improving Your Net Profit With Peel

Now that you have a clear picture of how to calculate and improve your net profit, you're sure to see bottom-line results.

The main idea here is to keep your company away from net loss, which is when your costs exceed your revenue. That is a recipe for disaster. Automated analysis tools allow you to make timely adjustments to your sales and marketing strategy to make the most out of every customer metric possible.

You can learn even more about your business with Peel. Our analysis tools help business owners to monitor their financial health and performance by automating the reporting of business metrics across all segments. Curious to see Net transactional sales by discount code, or profit per products or locations? Try Peel today and learn how to automate the calculation of your revenue, total sales, net sales, net subscription sales, refunds, discounts, and profit.