The net profit is the total profit of your business for a period of time after you’ve subtracted all of the expenses. You can also calculate the net profit by subtracting indirect costs, taxes, and expenses from gross profit.
The net profit is the amount of money that remains available in the company after you’ve paid the salaries, the taxes, and the indirect costs. This amount of money can be invested in business development. Depending on the amount of money, you can also consider opening a new store or offer more products to increase revenue.
How to calculate the net profit
It’s easy to calculate the net profit using this formula:
Net Profit = Total Revenue - Total Expenses
Let’s take a simple example: You manage to sell products that bring in $20.000/month. The cost of the goods is $5000 which means that your gross profit is $15000/month. However, you also pay $5000 in salaries, $300 in taxes, and $1000 on utilities.
After adding all of the costs ($9000), you can subtract them from the gross profit directly. This means that your net profit is $6000.
Calculating both the gross and the net profit will help you see what your main expenses are and how you can adjust them to increase profit.
What is the difference between net and gross profit?
Sometimes, the net profit and gross profit tend to be mixed up. The gross profit is calculated by subtracting the costs of the products from the revenue provided by selling those products. Yes, it includes the costs of manufacturing if you are the one that manufactures them. The gross profit shows you the difference between the costs of the products and the profit they bring.
The gross profit, on the other hand, is the amount of money that remains after you paid the employees, covered all of the utilities, and paid the taxes.