What are net profits and what do they mean for economists? How to improve the net profit for the business is something that everyone wants to know. Learn how this profit is calculated, as well as some suggestions for improving it if you don’t know where to start.
What is the net profit?
|What is net profit actually?
Those who are still wondering what the net profit is is certainly not a small number. Understanding them as well as how to calculate them will help businesses do business more efficiently.
Net profit or net profit/profit after tax is the profit remaining after taking total sales minus product costs and other taxes.
How to accurately calculate net profit
Calculating net profit helps businesses know exactly what percentage of their total revenue is profit. From there, they will evaluate whether their business activities are going in a good and effective direction.
Net Profit = Total Revenue -(Cost + 10%VAT) – Corporate Tax.
Net profit will be largely affected by the operating expenses of the business. Therefore, to increase net profit for your business, reasonable cost reduction is a prerequisite. Usually, a business’ operating expenses of about 5% is reasonable.
What is the meaning of net profit?
|How does net profit help investors look?
As is known, net profit will contribute to the assessment of whether the operation or business of a business is effective or not. If this profit index is larger, the business “does” better. Specifically:
- If the net profit is less than or just zero, the business shows signs of loss and the business itself is in danger of standing on the verge of bankruptcy. At that time, businesses are forced to find the right and timely direction to revive their premises.
- If this index exceeds the threshold, the business is doing quite well at its job and strategy. Businesses need to maintain and innovate actively to receive larger destinations.
In addition, this indicator in different industries will represent different meanings. Therefore, in order to accurately analyze the financial situation of an enterprise, we must evaluate according to the industry average or among enterprises in the same industry at the same time.
The role of net profit
Businesses, regardless of their business lines, want to optimize their net profit. Therefore, this index plays an important role when evaluating a business. This is clearly demonstrated by the following factors:
Help your business stay stable
|Business needs to have an acceptable net profit to maintain and grow
A business with good profits will help businesses feel more comfortable and confident when it comes to potential financial problems. No net income, forcing businesses to think and calculate how to raise or close the company.
For example, if you get 500 million dong in revenue and expenses account for 450 million dong, the annual net profit will be 50 million. If your annual expenses are VND 525 million, you will have a shortfall of VND 25 million per year. It is this long-term shortage that will put the company in trouble.
Lower cost internal investment
Investing with the net profit of the business is a typical internal investment today. This form of “investment” is often lower than outside investment and subsidies. However, you will not have to pay any interest to the creditor or the bank you borrowed the loan from.
If you are a business owner and earn VND 100 million per year, you can use that money to invest in your business without any interest or time constraints.
Attracting funding and sponsorship
|Stronger investment attraction
When there is a net profit, it means that your company is doing business effectively and has growth potential. This will help businesses attract a lot of funding and investment from outside.
Most banks make it easy for high-profit businesses to borrow money. Because those companies are able to repay loans quickly and generate higher profits.
Take, for example, a small business that has increased its net income for three years in a row more easily than a business that is losing money and does not see the possibility of recovery in the near future.
Enhance business value
Investors always estimate the value of companies by taking the company’s annual net income and multiplying it by a multiple specified by the market. This number represents peer companies, and all other things being equal, the higher your net profit the more valuable your company is relative to the competition.
Surely, investors will choose you over other competitors. Cash flows from investment will help businesses grow stronger and gain great positions in the market.
What is net profit affected by?
|Cost is a factor that directly affects net profit
Once we understand what net profit is, we should understand net profit margin. Because the net profit margin is a number that investors can look at to understand what percentage of the business’s total revenue is profit.
This metric is often influenced by both variable and fixed costs. So what are variable or fixed costs?
Also known as cost of goods sold, this cost will vary based on the number of products produced and some amounts incurred in the business process. These types of costs include the cost of materials, machinery, staff salaries, product packaging, goods, equipment costs or depreciation of used equipment, etc.
E-commerce businesses will reduce a lot of these variable costs because they do not directly produce products to sell. Variable costs for this type will be simpler because they only need to pay the last unit to buy the product being sold without breaking up many processes.
Fixed costs will be less variable over time. They are office costs, salaries for employees (not directly involved in the production of products), taxes of all kinds, costs of premises, welfare expenses for employees, …
What is the net margin? How important is it?
|Net profit ratio is one of the necessary conditions for businesses to orient strategy
Net profit margin is expressed as a percentage and it helps investors have a more accurate and correct view of the invested unit’s finances .
The calculation formula will be (net profit / total revenue) * 100
When this index exceeds the industry average, it is a sign that the business is in a competitive position. For businesses to achieve these numbers, they must either increase their sales or reduce their operating expenses.
However, if this sales promotion requires businesses to spend more, but the efficiency is not high, or production is reduced so as not to affect quality, the enterprise must expand its scale strategically.
“Formula” effectively improves net profit
For businesses to operate more efficiently and achieve better profits, we need:
Reconsider product price
|How to determine a reasonable selling price, bring good net profit?
How to price products to achieve the desired net profit margin is a challenge for many businesses. Even a small change in the price level can cause a dramatic change in the net profit of a business.
How to set the price depends on supply, market demand and consider whether it is a price that can retain customers or not.
In addition, to reduce costs while still optimizing COGS, business owners need to negotiate better import prices with suppliers. Not only will this help you improve your profits, but your net margin will be higher than expected.
Remove unprofitable products
After optimizing input costs, you need to capture the business situation and analyze product and service data. Profitable items need to be maintained and developed strongly. Unprofitable items should be eliminated with discount campaigns to consume all inventory.
|Fast and timely cargo control
Goods in stock if left in stock for too long will affect product quality. At that time, if there is no strategy to reduce inventory, it will greatly affect sales.
Besides, timely tracking of inventory is also a way for businesses to import goods in the right quantity and in a timely manner.
Many businesses choose to use professional sales management software to manage their inventory and inventory levels quickly and accurately. This will not only be convenient, but will also help save costs and reduce losses. These factors have helped the business increase its net profit significantly.
At the end of the month, managers need to check and review expenses including rental costs, purchasing supplies, staffing costs, interest rates payable to the bank, etc. to improve net profit.
As technology develops, the integration between management and hiring software will help reduce labor costs. Focusing employees on jobs that require creativity and dynamism is what businesses should do.
Note: The corporate income tax rate is fixed, so in addition to investing and developing a strong business, cutting unnecessary expenses is also a measure to increase the net profit index.
Understanding what net profit is, how net profit is calculated and how to improve this metric will help businesses confidently grow and grow even more. Applying the right strategy and always innovating is always the right thing that every business is looking for.