What is a Net Profit?
A net profit is the amount of money a company has earned or collected, after expenses, in a given amount of time. It is typically calculated by taking the total amount of income a company has received and subtracting its total amount of expenses from this number. This calculation leaves a figure that is called the net profit. In many cases, a company's net profit is referred to as its bottom line. It is essentially the amount of money a company has actually made once it considers all of the money it has to pay out.
The terms gross and net profit are often used in accounting. In most cases, gross profit is a number that represents the amount of revenue a company or business person has received, after considering the amount of money it spent on creating or buying the products it sold or providing its services. If a sole proprietor, for example, makes custom invitations, he might earn $500 US Dollars (USD) on one order. He may, however, spend $200 USD on supplies used to produce the order and printing. In such a case, $300 USD would be his gross profit.
Net profit is slightly different from gross profit. To calculate it, a person starts with gross profit and subtracts the total expenses he has for running his business in a particular time period. For example, a company may sell mobile phones and make sales that total $10,000 USD over a month. To come up with net profit, the company may subtract its total expenses, including taxes, wages, and refunds from this amount. The number that is left over would be considered its net profit.
It’s easy to confuse net and gross profit, as they are so closely related. The two are quite different, however. Gross profit is a much more targeted amount. It only involves calculating the revenue received and the expenses that can be directly attributed to making, producing, buying, or providing a product or service. This may include sales fees and shipping costs in many cases.
Net profit is typically more expansive. It often includes all of the costs of running the business from which the products or services are sold. For example, it may include such costs as phone bills, electricity, rent, payroll, marketing, and even vehicle-related expenses.
While both net and gross profit are used in accounting, many people find net calculations a more accurate gauge of a business’ success. It indicates how much money a business' endeavors are actually making. As such, calculating it can help a business person determine whether or not his business is making enough money to be worth the time and effort he puts into it.
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