Hi Friend KH,
As a businessman, it is important for you to know how to calculate profit easily and precisely. As we know, profit in business is divided into two types, there is net profit and gross profit. Both have differences that we must know, so that we can calculate how much net income is obtained from the business being run.
In economic theory, profit is an increase in company wealth. Meanwhile, according to the science of accounting, profit is the difference in revenue realized from transactions that occur at a certain time and costs incurred within a certain time.
The definition of profit in general itself refers to the difference between total costs and revenues obtained from business processes. The formula for calculating profit for each type is different, that’s because the definition of net profit and gross profit is different.
Net Profit
Net profit is gross profit that has been reduced by the types of costs, such as rent, production costs, operating costs, salary costs, taxes and others.
Net Profit
can also be referred to as
bottom line
because the position of net profit is always at the bottom of a company’s income statement.
In addition, net income also represents the money left over after expenses are paid, which is why net income is commonly referred to as net income.
Gross Profit
Gross profit or gross income is all revenue from sales before deducting cost components, for example production costs, salaries, overhead costs, taxes and others. The gross revenue earned cannot be directly calculated as the profit of the company.
Since we already know the meaning of each type of profit, as well as briefly understand the difference between the two by definition, let’s focus this discussion on net profit.
There are 6 benefits in calculating net profit, including:
- As a reference for banks or creditors to provide capital loans
- As a bargaining chip for investors to invest in your company
- Help determine the financial stability of the company
- As a reference for making long-term plans
- As an evaluation material to determine business strategies in the next year
- One way to see if a company is growing or not
How to Calculate Net Profit
As mentioned above, net profit is gross profit minus any costs or expenses that have not been deducted from the company’s revenue. Usually, gross profit is reduced by various cost components such as taxes, interest (if there is a loan to the bank), operating costs, depreciation costs, and so on.
The formula for calculating net profit is:
Total Income – Total Expenses = Net Profit
Or
Gross Profit – Expenses = Net Profit
For further understanding of the formula for calculating net profit, let’s look at the case example below.
Toko Shinta Baju Shinta has a gross profit from sales in 2020 of Rp 35,000,000. The gross profit has not been reduced by other costs, such as: Taxes (Rp 3,500,000), store operational costs (Rp 4,200,000), loan credit to the bank for a total of one year (Rp 12,000,000). So the net profit of Susi’s cake shop during 2020 is as follows:
Rp 35,000,000 – (3,500,000 + 4,200,000 + 12,000,000) = Rp 15,300,000
So, the net profit earned by Shinta Clothing Store in 2020 amounted to Rp 15,300,000.
Please also note, if you want to calculate the net revenue margin, divide net profit by total revenue and multiply by 100, with the following formula:
Net Profit Margin = (Net Profit / Total revenue) x 100
Check out the following case example to know the application of the formula.
Company A and Company B have net revenue margins of 15% and 18% respectively. Each of the two companies earned Rp150,000,000 in revenue.
What is the net profit earned by each company?
Step 1: Write the formula first
Net Profit Margin = Profit / Net Income
Net Profit = Net Margin x Revenue
Step 2: Calculate the net revenue for each company
Company A:
Net profit = Net Margin x Revenue = 15% x Rp150,000,000 = Rp22,500,000.
Company B:
Net Profit = Net Margin x Revenue = 18% x Rp150,000,000 = Rp27,000,000.
It’s important to remember that your net income is not a measure of how much you earned over a period of time. This is because the income statement includes many non-cash expenses, such as depreciation and amortization.
There are five factors that affect the size of net income, such as:
- Total variable costs to be paid
- Number of products sold
- Nominal fixed costs remain stable so as not to affect business expenses
- Depreciation costs of equipment used for production and operations
- Changes in rent, marketing costs, and employee benefit costs
KH friends can also use accounting software to calculate net profit, so that business management can be more effective and optimal. Calculations using software have various advantages such as recording transactions to business financial reports can be presented instantly.
How Important is Net Profit to a Company?
Net income is important to a company for several reasons. The first is that it can help determine financial stability. However, it also depends on your role as a businessperson whose revenue can bring a variety of benefits.
For example, investors who use net profit indicators to determine how worthy a company is of their investment risk. Then there are lenders who determine whether they should offer a business loan through net profit. That way, KH as a businessman will be helped in assessing your financial position compared to other similar businesses.
The second reason is that net profit can help you understand not to get hung up on how much money you make. The reason is, you could be generating revenue but not be profitable. What you can do is to evaluate your business model and strategy. The evaluation aims to see the shortcomings or weaknesses of your business, and analyze the development of the right business growth plan in the future.
Finally, you can use your net profit to increase your marketing budget, hire more human resources, and even invest in new opportunities.
KH Contact
That’s the discussion related to net profit, starting from the definition, the difference with gross profit, several ways to calculate net profit, to the role of net profit for the company.
KH friends if you still have questions about net profit, or need consulting services related to how to calculate the net profit of a business, or various other business-related questions ranging from needing legal services, business, establishment of PT, to how to register a brand, do not hesitate to contact us, Kontrak Hukum.
KH friends can contact Kontrak Hukum at the following link Tanya KH, and for more information, can visit the official website of Kontrak Hukum https://kontrakhukum.com/keuangan-dan-pajak/ or you can also follow our social media instagram @kontrakhukum.
