Net profit is one of the most important factors that affects the profitability of a business entity. A reliable analysis of this indicator can provide an answer to the question of whether the company should continue the path it has begun, or look for other ways to generate income.
Net profit is the part of the income remaining at the organization’s disposal received after all costs incurred for the production and sale of products, as well as the payment of mandatory payments and taxes. Its purpose is to stimulate the team and expand production processes. The amount of net profit affects the calculation of dividends intended as remuneration to shareholders of the company. It is used as a source for the formation of reserves and funds, as well as for the growth of fixed assets and reinvestment in production.
Net profit is the most important indicator for any enterprise. Its value is the result of the activities of a business entity. Successes in the company’s work are reflected in growth, and failures - in the fall of this indicator.
Net profit, the definition of which is an important point for the analysis of the enterprise, begins with the establishment of gross income. This indicator is the amount of revenue received from the sale of services, goods, work, taking into account discounts and does not include the cost of goods that were returned to the company by buyers. At the next stage, all expenses incurred for the manufacture of products and services are calculated. After that, gross profit is determined, which is the difference between gross income and cost. The amount of other expenses is also determined. It includes the following costs:
- to search for markets and new partners;
- to conclude new transactions;
- due to force majeure circumstances;
- to pay fines, penalties and interest on loans received.
Net profit is the difference between gross income and cost, as well as other income and taxes. If the amount received is with a minus sign, then this will indicate an unprofitable work of the enterprise.
The use of the amount of net profit depends on the decision of the head of the organization. Most often, it is aimed at the formation of various reserves and funds, the payment of dividends, and also remains for the purpose of accumulation. Due to net profit, an enterprise can provide charity by transferring a certain percentage of it to social needs.
The average value of the normal indicator of net profit, deduced by the economic services of Britain, should be fourteen percent. Enterprises that receive a value less than this figure, in their opinion, can be considered unprofitable.
Net profit belongs to the group of the most significant financial indicators of the reporting entity. Data on the size of this value is of primary interest to external users. If in the dynamics of the period under review the net profit indicator has significant fluctuations, then this fact will cause a wary attitude among investors. In this case, the organization will have to provide detailed explanations of the reasons behind these changes.
It is not possible to accurately assess the performance of the enterprise on the basis of only one indicator - net profit. Types of profit, which also affect the opinion on the effectiveness of the business entity - these are two more components of income. Their values are reflected in the annex to the balance sheet. You can find them in the income statement. The methodology for reflecting these indicators and the procedure for accounting for them are contained in IFRS 8. These include profit (loss) from ordinary activities, as well as results from extraordinary circumstances.