For any businessman or individual entrepreneur, profit is important. This is the result, which is at the same time the reason for opening any business. Without profit, activities aimed at generating income do not make sense. To successfully promote their product on the economic market, manufacturers need to analyze, plan and track a variety of indicators. Ignorance of the factors affecting the development prospects of the company can lead to negative results. One of the factors demonstrating the success of a company is the net profit indicator. The timeliness of payment of wages to employees, the income of managers, the creation of a fund to solve the financial problems of the enterprise depend on it. To calculate the indicator, the net profit formula is used. After reading the article, everyone will be able to understand what this coefficient is and how to find it out.
Definition
Net profit is an integral part of the balance sheet profit of the company, remaining at its disposal after the final payment of all mandatory contributions (taxes, deductions, fees). This is the most important economic indicator of the enterprise, reflecting the efficiency of all structural units of the organization. It should not be confused with the phrase "economic profit." This factor is the result of the company's activities for the entire reporting period. Thanks to the result that the net profit formula gives out when calculating, you can calculate the coefficients expressing profitability, financial stability, and liquidity. This factor is used when approving methods to assess such conditions as bankruptcy, credit and solvency, as well as investment attractiveness.
Who cares about net profit?
Investors use this indicator in determining the profitability of the company, as well as its ability to generate financial flows. Due to net profit, lenders can determine the rate of economic reliability of the company and its ability to pay obligations. This factor also affects the value of the enterprise, which is very important for managers and owners. According to the net profit indicator, suppliers determine the ability to make payments for the materials and components provided in the right time. Managers also use the term net profit. The calculation formula is used to obtain the number necessary to determine the stability coefficients of the enterprise, the opportunity for the development of innovative technologies and updating production assets.
Factors affecting the indicator
The main source of capital gains is net profit. The calculation formula allows you to get the coefficient, based on which the owners determine the dividend and investment policy, subsequently carried out by the company taking into account the prospects for its development. This indicator depends on the amount of revenue from sales, the cost level, the financial results of ordinary work, the amount of income tax and other mandatory payments.
Realization of net profit
These funds are used to update production assets, create inventories, improve the skills of working personnel, develop innovative technologies, create reserves, charity, external and internal investments, calculate dividends of shareholders.
Net profit analysis
It allows you to determine the overall dynamics and nature of the periodic changes in the efficiency of the enterprise. Net profit is inherent in fluctuations, as well as seasonality. There is a strong correlation between several important indicators. These data include the dynamics of net profit, sales revenue and net assets of the enterprise.
The credit rating of companies can be attributed to the investment class. When determining the estimates, the net profit balance sheet formula is used. This rating allows you to effectively attract the flow of funds of foreign investors.
Calculation of net profit: formula
This indicator is equal to the balance of gross profit after making all necessary payments (taxes, fees). A certain period of time (year, quarter) is taken for the study period.
So, the result of summing up financial, gross and operating profit with the subsequent deduction of the amount of taxes forms a coefficient. This is net profit. The calculation formula can be simplified. The indicator will be equal to the difference in profit before tax and the amount of mandatory payments. To record the result obtained, form No. 2 is used. The indicator indicated in the 190 line of the profit and loss statement is used to further determine the development prospects of the company.
Calculation algorithm
First you need to determine the necessary reporting period, for which you should summarize. The figures are taken only for the selected time, otherwise the result will not be displayed correctly. Before your eyes there should be a net profit formula. To determine the indicator, information on financial, gross, operating profit and the amount of taxes is required.
Calculation Procedure
First you need to determine the volume of gross income. This is the amount of revenue from the services provided or goods sold.
Next, you need to calculate the net gross income. This is the amount of income from which the amount of bonuses presented to customers is deducted, as well as the funds returned to consumers in case of rejection of the received goods or services.
Follow-up to determine the net profit of the enterprise
Then you need to calculate the total cost of manufacturing products. This amount is included in the cost. This includes the cost of providing services.
Next, you should analyze gross profit. To do this, subtract the cost of the product from the net income defined in the second paragraph.
Finally, you can calculate the net profit. The formula will allow you to get a result that can be used in further analysis of other coefficients. To get the indicator from gross profit, you should subtract operating expenses and other mandatory contributions. It is about paying fines, loans, taxes and deductions.
International standards
Thanks to numerous studies conducted by world economists, the minimum coefficient was calculated, which allows you to get the net profit formula. It is equal to 14%. If the indicator is less than the specified figure, then the company is considered unprofitable, despite the size of the total income. When the ratio is reached, the company begins to develop, and the activity becomes profitable.
A specific example of determining the net profit of an enterprise
First, income and expenses are calculated. After this, you can begin to determine the indicator of net profit (or loss) from the operation of the enterprise. Expenses related to commercial activities are deducted from entrepreneurial income. The resulting number can be both loss and net profit. The formula for the balance of income and expenses will determine the difference between them. The resulting number may be positive. Then the result is recorded as net profit. The formula allows you to calculate losses. When expenses exceed income, the difference becomes negative. Then the result is recorded as a net loss. If the owner owns several enterprises, the calculation is carried out for each of them separately.
Profitability
This is an indicator of the economic efficiency of the enterprise, showing how much of the organization’s income is profit. It has many different variations. Most often referred to sales profitability on gross and net profit. This indicator informs the entrepreneur about the level of effectiveness of various means. These include material, labor, monetary and other resources. When the calculation of net profit begins, profitability and loss are necessarily mentioned. The second criterion is an indicator that most accurately reflects the difference in income and losses from the payment of fines, penalties, forfeits, etc.
Profitability ratio
It is calculated as the ratio of previously determined net profit to all resources and assets included in its composition. In order to get the result in percent, you need to multiply the coefficient by 100%. There is a return on gross, net and operating profit; current, non-current and other assets; equity. The first 3 indicators demonstrate the economic efficiency of turnover during the sale of products.
Net Profit Margin: Formula
This ratio is an indicator of the share of net profit in a specific sales volume. Several numbers can determine the profitability of net profit. The calculation formula is not so complicated. To determine the coefficient, enough data specified in the form No. 2 of the financial statements of profit and loss.
Profitability ratio is calculated as follows: this is the ratio of net profit to total revenue. The minimum value of the result is determined by industry and other features of the organization. With the same economic work of several institutions, the profitability of enterprises with a long production cycle will be higher.
Notes
It is worth noting that this indicator demonstrates the profitability or loss-making of the existing organization, but is not a solution to the question of how profitable investments are in its work. In order to make a decision on this matter, you should calculate the return on assets and capital.