## Formula of net profit - calculation

For any businessman or individualentrepreneur is important profit. This is the result, which is at the same time the reason for the discovery of any case. Without profit, there is no sense in activities aimed at generating income. To successfully promote their product in the economic market, producers need to analyze, plan and track a variety of indicators. Ignorance of the coefficients that influence the company's development prospects can lead to negative results. One of the factors demonstrating the success of the company is the net profit indicator. It depends on the timeliness of the payment of wages to employees, the income of managers, the creation of a fund to solve the financial problems of the enterprise. The net profit formula is used to calculate the indicator. After reading the article, everyone can understand what this coefficient is and how to recognize it.

## Definition

Net income is an integral part of thebalance profit of the firm remaining at its disposal after the final payment of all compulsory contributions (taxes, cash deductions, fees). This is the most important economic indicator of the enterprise, reflecting the efficiency of the work of all structural divisions of the organization. It should not be confused with the phrase "economic profit". This factor is the result of the company's activity for the entire reporting period. Due to the result, which gives out when calculating the formula of net profit, you can calculate the coefficients expressing profitability, financial stability, liquidity. This factor is used when approving techniques that allow assessing such conditions as bankruptcy, credit and solvency, and also investment attractiveness.

## For whom the net profit is important

Investors use this indicator whenDetermining the profitability of the company, as well as its ability to generate financial flows. Thanks to net profit, lenders can determine the norm of the company's economic reliability and its ability to pay liabilities. This factor also affects the value of the enterprise, which is very important for managers and owners. In terms of net profit, suppliers determine the ability to make payments at the right time for the materials and components provided. Managers also use a term such as "net profit." The calculation formula is used to obtain the number necessary to determine the stability coefficients of the enterprise's functioning, the possibilities for the development of innovative technologies and the renewal of production assets.

## Factors affecting the indicator

The main source of capital growth isnet profit. The formula of calculation allows to receive a coefficient, based on which the owners determine the dividend and investment policy pursued subsequently by the enterprise taking into account the prospects of its development. This indicator depends on the volume of proceeds from sales, the level of cost, financial results of ordinary work, the amount of income tax and other mandatory payments.

## Realization of net profit

These tools are used to updateproduction assets, creating inventories, improving the skills of working personnel, developing innovative technologies, creating reserves, charity, foreign and domestic investments, calculating dividends of shareholders.

## Analysis of net profit

It allows you to determine the overall dynamics and characterperiodic changes in the efficiency of the enterprise. Net profit is inherent in fluctuations, as well as seasonality. Between several important indicators there is a strong correlation relationship. These data include the dynamics of net profit, sales revenue and net assets of the enterprise.

The credit rating of companies can be attributedto the investment class. In determining estimates, the net profit formula is used for the balance sheet. This rating allows you to effectively attract the flow of funds from foreign investors.

## Calculation of net profit: formula

This indicator is equal to the balance of gross profit after the implementation of all necessary payments (taxes, fees). For the period under investigation, a certain period of time (year, quarter) is taken.

So, the result of summing the financial, grossand operating profit with subsequent deduction of the amount of taxes forms a coefficient. This is the net profit. The calculation formula can be simplified. The indicator will be equal to the difference between profit before tax and the amount of mandatory payments. To record the result obtained, form No. 2 is used. The indicator specified in the 190 line of the profit and loss statement is used for further determination of the company's development prospects.

## Algorithm of calculation

First you need to determine the required reportingthe period for which to summarize. Figures are taken only for the selected time, otherwise the result will be displayed incorrectly. Before the eyes should be the formula of net profit. To determine the indicator, you need information about financial, gross, operating profit and the amount of taxes.

## Calculation procedure

To begin with, you need to determine the amount of gross revenue. This is the amount of revenue from the services provided or goods sold.

Next, you need to calculate the net gross receipt.This is the amount of income from which the amount of bonuses donated to customers is deducted, as well as the funds refunded to consumers in case of refusal of the received goods or services.

## Follow-up actions to determine the net profit of an enterprise

Then you need to calculate the total amount of production costs. This amount is included in the cost price. This includes the costs of providing services.

Next, you should analyze the gross profit. To do this, we must subtract from the net income, as defined in the second paragraph, the cost price of the product.

Finally, you can calculate the net profit.The formula will yield a result that can be used in further analysis of other coefficients. To obtain the indicator from gross profit, you must deduct operating expenses and other mandatory contributions. We are talking about the payment of fines, loans, taxes and deductions.

## International standards

Thanks to numerous studies,conducted by world economists, the minimum coefficient was calculated, which allows obtaining the formula of net profit. It is equal to 14%. If the indicator is less than the specified figure, then the enterprise is considered unprofitable, despite the size of the total income. When the coefficient is reached, the company begins to develop, and the activity becomes profitable.

## A concrete example of determining the net profit of an enterprise

First, income and expenses are calculated.After this, you can proceed to determine the indicator of net profit (or losses) from the work of the enterprise. Business expenses are deducted from expenses related to commercial activities. The resulting number can be both a loss and a net profit. The formula for the balance of income and expenditure will allow to determine the difference between them. The resulting number can be positive. Then the result is recorded as net profit. The formula allows you to calculate and losses. When costs exceed income, the difference becomes negative. Then the result is written as a net loss. If the owner owns several enterprises, the calculation is carried out for each of them separately.

## Definition of profitability

This is an indicator of economic efficiencyActivity of the enterprise, demonstrating, what part of the income of the organization makes profit. It has many different variations. Most often mentioned profitability of sales by gross and net profit. This indicator informs the entrepreneur about the level of effectiveness of various means. These include material, labor, money and other resources. When the net profit calculation begins, profitability and loss are necessarily mentioned. The second criterion is an indicator that most accurately reflects the difference in income and loss from the payment of fines, penalties, forfeits, etc.

## Coefficient of profitability

It is calculated as the ratio of a certainpreviously net profit to all resources and assets included in its composition. In order to get the result in percent, you must multiply the coefficient by 100%. There is a profitability of gross, net and operating profit; circulating, non-current and other assets; own capital. The first 3 indicators demonstrate the economic efficiency of turnover during the sale of products.

## Profitability of net profit: formula

This ratio is an indicator of the sharenet profit in a specific volume of sales. By several numbers, you can determine the profitability of net profit. The calculation formula is not so complicated. To determine the ratio, the data specified in Form No. 2 of the profit and loss account is sufficient.

The indicator of profitability is calculatedas follows: this is the ratio of net profit to total revenue. The minimum value of the result is determined by the industry and other features of the organization. With the same economic performance of several institutions, the profitability of enterprises with a long production cycle will be higher.

## Notes

It is worth noting that this indicatordemonstrates the profitability or unprofitableness of the activities of the existing organization, but it is not a solution to the question of how profitable investments are in its work. In order to make a decision on this issue, it is necessary to calculate the profitability of assets and capital.