Why is Net Profit Important?
Net profit can give you a quick idea of the success of a company. This information is valuable to investors, managers, and stockholders. It represents the money leftover after expenses and taxes are paid. Obviously, the bigger the net income, the better. However, just having a high net income one month doesn't mean everything is all right. What is most important is bringing in a good net income consistently, month after month.
Factors of the Formula
The first part of the equation is gross profit. This tells us how much money remains after paying for the inventory that was sold. Thus, gross profit is equal to revenue minus the cost of goods sold. The next part is operating expenses, which is the amount of money spent on selling the inventory. This amount is subtracted from gross profit. Finally, we subtract taxes and interest from the gross profit to give us our net income. The interest used in this calculation is interest on loans.
Once you know the net income, you can also calculate the net profit margin, which shows the percentage of your revenue that is left after expenses are paid.
How to Calculate Net Income
Let's look at a quick example:
Bayside Manufacturing Corp. has $450,000 in revenue, and $50,000 as their cost of goods sold. This leaves them with a gross profit of $400,000. They have $25,000 in operating expenses, $10,000 in taxes, and $5,000 in loan interest. Those three figures total $40,000. We subtract those costs from $400,000, which leaves us with a net income of $360,000.
Net Incomes at Large Corporations
To give you an idea of what kind of money big companies are working with, here are a few examples.
Coca Cola: $8.5 billion
PepsiCo: $6.7 billion
Hewlett Packard: $5 billion
IBM: $16.4 billion
Walmart: $16 billion