Net profit is one of the important indicators to evaluate the business performance of an enterprise. Therefore, businesses need to carefully strategize to achieve increasing net profit growth. In this article, Viindoo will provide you with useful information as well as effective methods to optimize this index.
Concept and meaning of net profit
Net profit is the profit a business earns after deducting all other costs and expenses from revenue. These expenses include: cost of goods sold, selling expenses, business management expenses, taxes and other expenses incurred during the financial reporting period.
Net profit is an index to evaluate the business performance of an enterprise
Net profit is an extremely important indicator. Because it plays a role in reflecting the ability to generate profits from the core business activities of an enterprise. This index shows the level of effectiveness in managing costs and optimizing profits. Businesses will rely on this index to effectively manage costs, thereby optimizing profits.
Formula to calculate net profit
How to calculate net profit: Net profit = Net revenue – Cost of goods sold + (Financial revenue – Financial expenses) – (Sales expenses + business management expenses)
In there:
- Net revenue: Is the actual revenue earned from sales and service provision activities after deducting revenue deductions. These include: sales discounts, sales returns, trade discounts...
- Cost of goods sold: Is the total cost used for the entire product production process. They include: direct material costs, direct labor costs, and manufacturing overhead costs.
- Revenue from financial activities: These are expenses related to financial activities such as: bank loan interest, financial lease interest, royalties, dividends,...
- Financial expenses: These are expenses that businesses must pay for financial activities. These include costs related to borrowing and other financial transactions.
Formula guides how to calculate net profit
How to distinguish net profit and gross profit
Net profit and gross profit are two concepts that often cause confusion for many people. Below is a comparison table and analysis of the differences between these two important indicators.
Revenues | Gross profit | |
Define | It is the remaining amount of money after deducting all costs related to the business in a certain period of time. | The amount of money remaining after deducting all costs related to the product or service (including production costs, transportation costs and selling costs). |
Cost level | Analyze and evaluate all types of business costs, including direct and indirect costs. | Only include direct costs related to the product or service. |
Overall level | Measure and evaluate the business performance of an enterprise in a certain reporting period. | Only calculate profit assessments related to each individual product or service. |
Importance | It is the most important index to help evaluate the business performance of an enterprise. | It is an important index to evaluate the efficiency of production and business activities on each product or service of an enterprise. |
How to calculate net profit ratio and illustrative example
Net Profit Margin is an index that reflects the profitability of a business. This index indicates the number of net profit that a business earns from each dollar of revenue.
Formula to calculate net profit margin:
ROS = (Profit after tax / Net revenue) x 100% (unit: %)
In there:
- Net revenue = Actual sales revenue – Revenue deductions (discounts, sales returns, trade discounts,...)
- Profit after tax = Profit before tax – Total tax payable + Deferred taxes.
Example to illustrate how to calculate net profit ratio
Illustration: Company A achieved net revenue after one year of business of 4,955 billion VND and net profit achieved 486 million VND. Thus, rate net profit (ROS) is:
ROS = (486 / 4955) x 100% = 9.8%
Thus, we can understand that for every 100 VND of net revenue, company A generates 9.8 VND net profit from business activities.
Principles of optimizing profits from effective business operations
To optimize net profit from business activities, businesses need to follow the following principles.
Strict cost control
Businesses need to carefully analyze and manage expenses to identify expenses that can be cut or optimized. It is necessary to ensure that these measures help save costs while still ensuring the quality of products and services.
Strict cost control is an effective way to optimize net profit
Some optimization measures include finding cheaper supply sources, applying advanced technology to improve production efficiency, optimizing work processes, etc. Businesses need to regularly monitor and evaluate these costs to make appropriate adjustments.
Maximize revenue
Besides controlling costs, businesses also need to make efforts to find ways to increase revenue. This can be achieved by applying strategies to expand production, develop new products or expand markets, etc. However, businesses need to analyze and consider carefully to avoid causing problems. Financial risks are difficult to control.
Businesses also need to apply many strategies to maximize revenue
Cash flow management
Focusing on effective cash flow management is extremely important. Businesses need to prepare a detailed cash flow plan to know the exact amount of money needed for business and investment activities. From there, businesses can make decisions about investing or repaying debt effectively.
Businesses need to focus on cash flow management to optimize net profit
Use management tools
Businesses can also take advantage of the support of management tools to manage finances and spending plans more closely. For example, financial management software will allow businesses to track expenses in detail. From there, businesses can identify unnecessary costs and save costs. These tools also help businesses plan spending in accordance with their current financial situation.
There are many management tools to help businesses manage financial activities effectively
In addition, there are a number of other management tools such as warehouse management software and production management software that also play an important role. They will help optimize the production process and reduce waste, thereby optimizing net profit for business.
Viindoo Accounting & Finance - Software to control net profit accurately
Viindoo Accounting & Finance is comprehensive budget management software, a powerful tool to help businesses control spending and optimize net profit. The software is designed with the ability to automatically analyze data, support accurate budget planning as well as measure the effectiveness of budget use compared to the plan.
Viindoo Accounting & Finance is the leading profit management software for your business
With a friendly and easy-to-use interface, Viindoo Accounting & Finance helps businesses manage and forecast budget revenue and expenditure in an intuitive and easy way. In addition, the software integrates a variety of accounting operations, fully complies with legal regulations, and completely ensures security for businesses.
Net profit is an extremely important measure of business performance, affecting the sustainable development of every business. Businesses need to build effective strategies that adhere to many important principles to optimize their profits. If you have any questions, don't hesitate to get in touch with Viindoo for immediate support!