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What is Net Profit and How Do You Calculate It?

Calculating your company’s net profit is one of the best measures of business success. The calculation represents the money left over after expenses are paid. It’s also commonly referred to as net income or the bottom line. Net profitability is an important indicator to measure, since increases in revenue do not necessarily translate to increased profitability.

 

The goal of successful online stores is to create a consistent net income month after month. This indicates your business is expanding at a sustainable pace and growth can be expected in the future. Growing businesses can use net income to save for future expenses, pay off debt, invest in new projects or distribute to investors.

The Calculation for Net Profit Is:

Net Profit = Total Revenue – Total Expenses

 

Example of Net Profit:

An ecommerce company has $350,000 in revenue minus $50,000 in cost of goods sold. That leaves them with a gross profit of $300,000. If $75,000 is allocated for salaries, $25,000 to operating expenses and $5,000 to taxes, those numbers are subtracted from the gross profit, leaving a net income of $195,000.

 

Don’t forget your net profit is not a measure of how much cash a company has earned during a given period. That’s because the income statement includes non-cash expenses such as depreciation and amortization.

How to Improve Net Profit

Review Pricing

Pricing products competitively with acceptable profit margins is challenging for many businesses. Even a small increase in your prices can make a significant impact on your net profit. Smart pricing strategies must take into account what the market will support in terms of supply and price.

Remove Unprofitable Products and Services

It’s important to analyze your product data in order to identify your profitable and unprofitable merchandise. Then you can decide if unprofitable products should be removed altogether or reviewed for areas of improvement. See how to find Cold Products here.

Control Inventory

Stock control can increase your cash flow and improve net profit. Some of your products will inevitably have higher margins than others. Careful control of your inventory will avoid high profit products from depleting and reduce the risk of selling lower profit products in their place. Find tips for managing inventory profitably.

Reduce Overhead

Regularly reviewing your overhead expenses is a simple way to improve your net profit. Benchmarking your overhead numbers to businesses similar to yours can highlight areas of improvement.

Reduce Overall Direct Costs

One way to reduce your direct costs is to negotiate better pricing from your suppliers and vendors and eliminate unnecessary purchases.

 

While net profit is an important metric to track in order to understand the state of your business, it’s doesn’t tell the whole story of how your ecommerce store is doing. Gross margin, cash flow and average order value and site traffic are other indicators of business success.

 

By closely and regularly monitoring ecommerce metrics, store owners can identify business performance and progress toward sales and revenue goals. Performance metrics can also drive better informed business decisions and identify areas of improvement.

Improve Net Profit with Glew

Calculating net profit can be cumbersome for ecommerce stores. It requires switching between Google Analytics, social dashboards and the ecommerce platform. With Glew’s ecommerce platform, discovering net profit is easy and intuitive. Glew allows users to calculate net profit by individual channels.

 

Glew’s Net Profit by Channel chart starts with channel level Revenue, then provides Cost of Goods Sold, Gross Profit, Gross Margin, Advertising Spend, Net Profit and Profit Margin. Glew’s ecommerce analytic dashboards tie together previously siloed data and allow you to access your data in a central location.

 

To see the benefits of Glew firsthand, we invite you to get started with a free trial.

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