Net income is generally the last item to appear on a statement, the final piece of information that provides business people with crucial information about the money left over once the company has paid all expenses. It also makes it possible to quantify with certainty the profitability of an economic activity. A company's net profit is also referred to as "net profit," although it is often simply referred to as "profit" in everyday conversations. Regardless of its importance, net profit is calculated relatively easily, using basic procedures that involve subtracting expenses from revenue.
Steps
Part 1 of 2: Obtaining and Organizing Information
Step 1. Set up an income statement
To calculate the net profit correctly, you must first fill out this statement. If you fill out an income statement while calculating net income, you organize the information in a simple way. You can proceed by hand or use a management program. Read this tutorial for more details.
An income statement takes into consideration a specific period, for example from January 1, 2014 to December 31, 2014. The time frame can vary, but is generally considered a month, a quarter or a year
Step 2. Get the necessary information
To calculate net income, you need all the information you need to draw up an income statement. This means retrieving a lot of data on the company's expenses and turnover. Again, refer to this article. You will find a more detailed explanation in the next section.
Generally speaking, an income statement must consider the source of a company's income (it is mainly sales, but it could also be interest) and the list of expenses divided by categories, including production, organization, administration costs., interest paid on debts and taxes
Step 3. Make sure you are using the correct formula
The calculation for net profit involves carrying out a very special equation. This follows in parallel the structure of the income statement. However, you can decide to find the final value even without creating a balance sheet, as long as you make sure you subtract the correct expenses at the right stage of the calculations. The general structure of the counts follows this order:
- Calculate "net sales", ie gross sales minus returns and discounts.
- Subtract the cost of goods sold from this to get the gross profit.
- At this point you must subtract the selling, general and administrative expenses to get the "gross operating margin" (EBITDA), ie the revenues before interest, taxes, depreciation of assets and depreciation.
- Subtract depreciation costs and depreciation of assets from EBITDA to obtain "business operating income" (EBIT), ie earnings before paying taxes and interest.
- From the EBIT you have to remove the expenses incurred to pay the interest and get the "result before tax" (EBT), ie the earnings collected before taxes.
- Finally, deduct the tax value from the EBT and you will find the net profit.
Step 4. Have the calculator handy
Depending on the size of your business, the net profit calculation could predict numbers with many digits or advanced mathematical operations. To make sure you are doing it accurately, use a calculator.
Part 2 of 2: Calculating Net Profit
Step 1. Determine the net sales
To get this data, called "gross revenue" or simply "revenue", you must add up everything you have collected, including the money you will receive for the products and services sold during the period covered by the income statement. These revenues must be recorded when the good or service has been delivered to the customer, even though the customer has not yet paid for it. This sum represents the first figure of the income statement and the first value for the calculation of the net profit.
Remember that some companies use the terms "sales" and "revenue" as if they were synonymous, but others identify as "sales" only the number of items sold, thus excluding money from other sources
Step 2. Determine the cost of the goods sold
These are expenses directly attributable to the production or purchase of the goods sold by the company. The sectors of trade and manufacturing industry generally show very high values under this heading. To find the total cost, add up how much was spent to purchase raw materials, the cost of labor (including the wages of people who are not in administrative or sales roles), and all expenses associated with production, such as energy. electric.
- If you are in the service sector, the "cost of goods sold" should be replaced with the "cost of profit" for the sake of clarity. In reality, this value represents the same basic concept; however, it excludes certain expenses such as wages, sales commissions, transportation to deliver the asset, and other costs that are incurred when the sale is made.
- Once you've found this figure, subtract it from your net sales. The final value is called "gross profit" and is used to measure the production efficiency of the company.
Step 3. Calculate the general, administrative and sales expenses
This value will then be subtracted in the next step. These are the total costs incurred for rent, salaries, fees (for administrative and sales staff), advertising and marketing, as well as those required to ensure the essential operations of the company. This data is also referred to simply as "operating expenses".
When you have calculated this value, you must subtract it from the gross profit to know the gains made before paying interest, taxes, asset depreciation and depreciation (EBITDA). EBITDA is useful for comparing the overall profitability between two companies or industries, because it ignores the effects of financial and accounting decisions on profit
Step 4. Find the costs related to depreciation and amortization
These values represent the money that is spent on a good, but distributed over time. Depreciation refers to the loss in value of a tangible asset (such as a machine); depreciation, on the other hand, also refers to the loss in value of an intangible asset (such as a patent). If the company accounts for these expenses in the income statement for several years, it splits the impact that investment costs have on net income, such as those incurred to purchase a new vehicle or plant.
- Depreciation and depreciation expenses are rather complex accounting concepts. Do some research online to find more information.
- Now that you have calculated these costs, you can subtract them from the EBITDA and find the EBIT (the revenues before paying taxes and interest). This figure, also known as "corporate operating income", is another useful value for measuring a company's profitability.
Step 5. Calculate the expenses incurred to pay interest
These refer to all the interest that the company has to pay, for example for a loan, including that which has to be paid to the bondholders. When calculating this value, remember to add to the revenues the money earned in the form of interest, obtained from short-term investments, such as certificates of deposit, savings or financial transactions.
When you have also calculated the interest, you need to subtract it (or add it if the interest income is greater than the expense) from the EBIT and find the EBT (result before tax). Thanks to this data, investors are able to understand the profitability of similar market sectors operating in states with different tax regimes
Step 6. Calculate your taxes
These are the taxes payable on income for the period taken into account by the income statement. The figure varies based on many factors, including turnover and regulations that may be subject to change. Remember that this figure does not include other taxes paid by the company, such as property taxes. The latter are part of the management costs.
Step 7. Subtract the tax value from the EBT and find the net profit
Performed this last subtraction, you have found the data you were looking for!
