Optimizing Net Profit is one of the best ways to know what your company actually earns in a certain period. By definition, net profit is the value that remains after the total operating expenses are subtracted from a company’s revenue (thank you, Klipfolio!). More specifically, we like to look at it as how we can analyze the economic health of a business. While the metric seems simple on the surface, it gives valuable insights into areas of future growth and improvement. We'll take you through how to calculate this metric, how to understand it in the context of your industry, and how to apply it to the platforms you're using now.
How to Calculate Net Profit
You can calculate net profit by getting the total operating expenses and subtracting it from the company’s revenue. Net profit can be assessed for various time-periods (i.e. day, week, month, year) and, if your operating expenses are tied to certain products or campaigns, you can assign a specific net profit for each.
If you’re confused about how to define operating expenses and revenue, we’ve included some nifty definitions and examples below:
- Operating expenses are the costs of a company’s operational activities. This includes Cost of Goods Sold (COGS), ongoing production or system cost, development cost, and tax and interest costs.
- Revenue is the total income of the company from its normal business operations. This may include the total sales of goods or services, dividends, and interests.
Note: Make sure to remember that net profit differs from gross profit! Gross profit only subtracts COGS from revenue, while net profit subtracts all operating expenses instead.
When choosing what to include in your calculations, remember: consistency is key! That means, if you decide to include XYZ in your net profit for the month, you should include it in the next month’s net profit as well. Having consistent metrics will allow you to better identify the causes of good or bad performance. For instance, if your net profit is still the same or has declined compared to your last month’s net profit, then there is something that you should improve in your business.
Connecting Net Profit to Your Business
Again, as you begin (consistently) monitoring net profit, you’ll be able to find insights specific to your strategy. Of course, it’s also important to understand your net profit in relation to your broader industry. To help you know what to expect, we’ve included a list of average net profit margin per industry:
- Auto Repair & Maintenance - 12%
- Construction - 5%
- Hotels & Hospitality - 8%
- Maintenance Services - 10%
- Restaurants - 15%
- Retail - 5%
- Tax Services - 20%
- Transportation - 19%
Further, while you can find revenue from many channels, we’ve identified popular platforms that are particularly relevant to net profit These may be good places to begin if you’re getting started with this metric:
- Shopify: As one of the biggest e-commerce platforms on the internet, it gives users weekly/monthly/yearly profit reports and helps them analyze the data. Aside from that, Shopify also offers different profit computations tools for its users.
- Stripe: This is an online processing system that offers its users financial reports from a certain period, which can include your net profit.
Tracking Net Profit with Lido
While net profit is easy to calculate, it’s important to keep in mind that net profit is one of many valuable metrics to track your performance. If you don’t want to spend hours at the end of the month juggling numbers from your Shopify and Stripe accounts, consider trying Lido. Lido can help you build a dashboard to monitor your data and give a look into how your key metrics (such as net profit) change over time.
Sign up for free and get started today.