STUDENT CORNER - 243

NET PROFIT

Any business must earn profit to continue in the business. And to know the profit of the company periodically helps the company know whether they perform well. We saw about the Gross profit in our last session and now we will spend some time on the net profit. We must know the difference between the Gross and Net profits; any businessman will automatically arrive at the Net profit which alone gives rather an exact picture of the performance of the company.

What is Net Profit? Net Profit is what the business has earned and to know it, you have to subtract all your expenses that is business related expenses, from the revenue you have got from the total sale of your products or services. That too, it is calculated for a specific period. The expenses include tax, interest you pay for the loan if any you have availed of, and all operating expenses (which include the money you pay to relevant authorities to keep the business moving smoothly- Hope you understand what is meant by it. Paying attention to the sanctioning authorities has become a norm nowadays and without this off-the record attention, you cannot hope to arrive at any profit out of your business soon; we all know delayed profit corrodes into the real profit of the company; your business instinct must know how to convert political intervention in any form into business-promoting venture; this is essential common sense;, established ethical norms, so to say)

Thus after deducting all, ALL expenses from the revenue, you know your net profit. Revenue is what you get from the sale of your products. Here, there is also net sales.  Revenue and net sales are closely related; net sales include the discount you offer to your customers when they buy your products,  Net sales tell you your final exact profit because net sales include damaged products which are returned to you by the buyer, your customer.

Such return of the damaged product affects not only your profit but also the reputation of the company. Therefore, you have to take all necessary actions to prevent or at least to minimize such returns of the damaged products.

Knowing the exact level of net profit is a must for a business to make any financial decisions such as expanding your business through diversification or acquiring more of raw materials in anticipation of growth of the sales. Gross profit will not make your financial decisions viable and reliable. So, net profit is what directs you the way you are moving in the business and the way you want to move ahead.