Quick Summary
All companies strive to achieve it and minimize losses to enhance their growth potential. Profit is the amount of money that is left over after removing all expenses incurred in running the business operations. Profit calculations are based on the operational expenses incurred during the accounting year. Net profit is a term that is popularly used to describe the company’s ‘bottom line‘. It is considered to be a true indicator of its performance.
Attracting good investment is needed for expansion. Potential investors check the company’s financial statements in detail before making a decision. The gross profit and loss statements are not taken into consideration. Instead, potential investors prefer to check the net profit or loss statements. These statements provide a clear picture of the financial performance of the company.
Profit is calculated as The amount that is left over after deducting expenses. Net profit is a term that describes a particular type of profit. It denotes a company’s profit margin within a particular period. Net profit is the measurement of a company’s financial position in an accounting year. It is calculated by deducting all the operational costs incurred while running the company. Taxes, depreciation, and interest on loans are also deducted from the company’s total revenue as operational costs.
Related Topic: What is Operating Profit
Using the net profit formula in accounting is a common practice. It helps the management understand the true financial position of the company. Based on this calculation, the management can make appropriate decisions to improve or maintain the status quo.
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Let’s say a company has the following financial data for a given period:
Formula:
Net Profit = Total Revenue – Total Expenses
Where:
Step-by-step Calculation:
COGS+OperatingExpenses+InterestExpenses+Taxes=200,000+100,000+20,000+30,000=350,000COGS + Operating Expenses + Interest Expenses + Taxes = 200,000 + 100,000 + 20,000 + 30,000 = 350,000COGS+OperatingExpenses+InterestExpenses+Taxes=200,000+100,000+20,000+30,000=350,000
Total Revenue−Total Expenses=500,000−350,000=150,000Total Revenue – Total Expenses = 500,000 – 350,000 = 150,000TotalRevenue−TotalExpenses=500,000−350,000=150,000
Profits indicate the success of a business venture. It is to this end that the management strives to cut down expenses. Different sales and marketing strategies are also put into place in an attempt to increase profits. These common practices help in creating profits within a short time but, they do not help in the long run.
A few reliable steps that management can take to improve net profits are listed below.
High overhead expenses can negatively affect your profit margins and hamper your growth. As overhead expenses include both fixed and variable components, they can be optimized to reduce business expenses. A few simple ways through which overhead expenses can be reduced are:
Inventory management is a crucial part of running a successful business. There are different types of inventory such as raw materials, in-transit goods, finished products, buffer stock, etc. Proper inventory management is essential to earn profits. Here are a few tips to help you have better control over your inventory.
Product pricing plays an important role in any business. The price of a product often determines its demand. But, it is important to review your product pricing at regular intervals to ensure profits. Below listed are some pointers that you should consider while reviewing your pricing.
Every business will have leftover stock that remains unsold. This can be caused by changing market trends, poor marketing, or some unpredictable thing. Whatever the reason, this unsold stock becomes a loss for the business. Identifying such loss-making goods and services will help to remove them and reduce business expenses. Here are some tips that can help you identify unprofitable goods and services.
Direct costs are the expenses incurred by the business for producing goods and services. Direct costs are operational expenses that include the cost of raw materials, labor, and purchase of equipment. Reducing direct costs can be a little tricky as they can negatively affect production. Here are some effective tips that can help you to reduce direct costs without impacting sales.
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Gross profit and net profit are two factors that help in predicting the company’s financial growth. Although both these terms sound similar, different variables are used for calculating gross profit and net profit.
Here is an explanation of the difference between gross profit and net profit.
The gross profit earned by a company can be calculated by deducting the cost of goods sold from the total revenue. Here, the cost of goods sold also includes operational expenses like the cost of equipment, labor, repairs, raw materials, etc.
Gross Profit = Revenue – Cost of Goods Sold
Gross profit calculation is essential for determining whether the business is efficient or not. The proper usage of raw materials, production supplies, and labor is considered for calculating gross profit.
Net profit is the profit that is left over after all the expenses have been deducted from the company’s revenue. The net profit of a company is also referred to as its bottom line. The calculation of net profit is essential for formulating new business strategies. Potential investors also check the company’s net profits as a part of their research before making a decision about investing in it.
Net Profit = Gross Profit – Expenses
Here, expenses also include rent, salaries, depreciation, and the cost of utilities. If this formula yields a negative number, then it signifies net loss. In some cases, companies that have a good gross profit may still incur a loss due to their high operating expenses. Net profit calculation helps business owners get a clear picture of their sales and operating expenses.
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In today’s fast-paced and competitive landscape, net profit isn’t just a financial metric—it’s a critical indicator of your business’s health, efficiency, and long-term viability. Understanding and optimizing your net profit empowers smarter decision-making, fuels sustainable growth, and secures investor confidence. Prioritizing profitability isn’t optional in 2025—it’s essential to thrive, scale, and lead in your industry.
Ans. Net profit is the amount that is left over after deducting the company’s revenue from its expenses. The net profit calculation can give a clear picture of the company’s financial position. The net profit formula is:
Net Profit = Total Revenue – (Total Expenses + Tax + Depreciation)
Ans. Net profit is the money you get to keep after all expenses and taxes are paid. Net profit is often called the bottom line because it appears as the last line of your profit and loss statement after all expenses have been taken out.
Ans. Net profit is the profit created by a company which is calculated by deducting the company’s expenses from its revenue. For example, a business AB has a revenue of Rs. 45000 and incurs an expense of Rs. 35000 in a financial year. Then the net profit of AB can be calculated as:
Net Profit = Revenue – Expense
Net Profit = Rs. 45000 – Rs. 35000 = Rs. 10000
Ans. The company calculates net profit by deducting the total expenses incurred by the company from its revenue. Here, expenses include operating costs, tax, and depreciation. This calculates gross profit by deducting the cost of goods sold from the company’s revenue. Here, the company adds the cost of raw materials, labor, and repairs.
Ans. However, the rule of thumb when it comes to net profit margins in a small business: anything over 10% is good; anything below 5% should be analysed.
Authored by, Amay Mathur | Senior Editor
Amay Mathur is a business news reporter at Chegg.com. He previously worked for PCMag, Business Insider, The Messenger, and ZDNET as a reporter and copyeditor. His areas of coverage encompass tech, business, strategy, finance, and even space. He is a Columbia University graduate.
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Chegg India does not ask for money to offer any opportunity with the company. We request you to be vigilant before sharing your personal and financial information with any third party. Beware of fraudulent activities claiming affiliation with our company and promising monetary rewards or benefits. Chegg India shall not be responsible for any losses resulting from such activities.