What is Net Profit?

Net ProfitWhat does net profit mean?

The monetary difference between the revenue and the cost of a business. The net profit is the money that you will have left over once you have paid all pending bills and expenses. Net profit is also known more casually as the “bottom line” because it is the final line in the accounting of revenues and expenses.

In order to work out your net profit, there are many different variables that need to be accounted for such as your mark up price and your overheads. Aside obvious overheads such as your staff wages and the rental price for a brick and mortar store you also need to include other variables in your calculation such as the taxes that you will have to pay on the profits of your business.

You need to understand though that net profit is not how much a company earned during a period of time. Once the cash expenses are subtracted from earnings there are also a number of non-cash expenses that have to be accounted for, such as amortization and depreciation. If you really want to know how much cash is generated by a company, have a look at the cash flow statement.

Net profit is an ever changing number that can be influenced by many factors, including changes in sales, profit margins, customer expectations, and even company management.

Not only will profit vary at a given company, but net profit is quite different from one company to the next, and expected net profits are quite different from one industry to another. In fact, it is often better to look at derivatives of net profit such as profit margin or price-to-earnings ratio to understand how profitable a company actually is compared with other companies in the same industry.

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