Net profit: what information this indicator offers you

When you have a business, it is key to calculate net profit and gross profit to know the earnings obtained. How are both concepts different, how are they calculated and what variables to include? Above all, why should you take them into account?

Differences between net profit and gross profit

If you want to know how much money you have earned and how profitable your business is, you must calculate the gross and net profit. The first consists of subtracting the cost of sales from the total sales produced. By contrast, net profit is obtained by subtracting all other costs that the company has had to assume. For example:

• raw materials
• transportation
• packaging
• services such as electricity and water
• taxes
• fixed and variable expenses

Keep in mind that these costs can increase or decrease, depending on your level of indebtedness, inflation, new taxes or measures that you can implement to reduce expenses. In addition, each company may have to assume specific costs related to its activity sector; for example, customs taxes or temporary personnel.

Ways to calculate net profit

There are two simple ways to know the profits of your business. You can do it manually or with an Excel table. These are the formulas you should apply:

• By numbers: gross profit – fixed and variable expenses • By percentage: gross profit – fixed and variable expenses / total income x 100

Let us see it with an example. Imagine that, in the last month, you have closed sales for a total of $50,000. From that gross profit, you must subtract the total of your expenses, which have totaled $15,000 under the following detail:

• commercial premises rental: $5,000
• services: $3,000
• inventory purchase: $4,500
• packaging: $1,000
• taxes: $1,500

In this example, your net profit expressed in numbers is $35,000. The result arises from subtracting the total of expenses from the total of sales made. Now, if you want to know your net income expressed as a percentage, you must apply a simple rule of three. What percentage of profits do those $35,000 obtained represent of the $50,000 spent?:

35,000 (total expenses) x 100 / 50,000 (total sales) = 70%

This means that the profitability of your business is 70%, which are the net earnings once expenses are deducted. It should be clarified that you can increase or reduce that percentage based on the economic objectives of your company.

Benefits of knowing your net profit and gross profit

Are you looking for new strategies to boost your company? Take advantage of the benefits of calculating your profits:

Have growth projection

One of your company's objectives should be medium- and long-term growth. To meet it, you need to include it in your annual planning with specific percentages of expected profitability. This will be reflected in the net profit you expect to obtain from the price of your products.

Keep in mind that, for growth to be balanced, the company needs to sustain an adequate level of solvency. In other words, it is about growing while avoiding over-indebtedness and maintaining the capacity to meet your financial obligations.

Optimize production and logistics processes

Through efficient financial management you can reduce costs at different points in the commercial and productive chain of your business. This will allow you to have a better cash flow, pay your debts on time and maintain a good profit margin.

For example, you can reduce the packaging of your products, contract a more economical transportation service and invest in new technologies. With this you guarantee improvements in production times and reduce failures or errors. Often, lowering costs is an indirect strategy to increase your profits without passing them on to the product price.

Increase profitability

The net profit shows the benefits your company has obtained once the costs directly associated with sales have been deducted. Thus, you can know for sure how much profit you have obtained and, if it is less than expected, take measures to improve it.

Keep in mind that the projected profitability should be one of the first objectives to detail in your annual planning. In view of the expected margin, you will be able to make decisions that lead you to reach business goals.

One thing to keep in mind is that, in the calculation of net profit, you must also include personnel expenses. Are you looking for new options to improve the social benefits of your employees? The voluntary savings program of the FNA and Cesantías are useful to ensure their future and improve their quality of life.

Bibliographic References

Clavijo, C. (2021). How to calculate the gross and net profit margin of your business. HubSpot.https://blog.hubspot.es/sales/margen-utilidad

Martínez, C. (2022). What is gross profit and net profit? Drip Capital Inc. https://www.dripcapital.com/es-mx/recursos/blog/utilidad-neta-utilidad-bruta