What is Net Profit and How Do You Calculate It?
The goal of successful online stores is to create a consistent net profit month after month. This indicates your business is expanding at a sustainable pace – and that growth can be expected in the future. Growing businesses can use their net profit to save for future expenses, pay off debt, invest in new projects, products or staff, or distribute to investors.
How to Calculate Net Profit:
Net Profit = Total Revenue – Total Expenses
Here’s an example: An ecommerce company has $350,000 in revenue with a cost of goods sold of $50,000. 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 then subtracted from the gross profit, leaving a net income of $195,000.
$350,000 – $50,000 – $75,000 – $25,000 – $5,000 = $195,000
Don’t forget: Your net profit is not a measure of how much you’ve earned during a given time period. That’s because your income statement can include a lot of non-cash expenses, such as depreciation and amortization.
What expenses factor into net profit?
Net profit includes both fixed and variable expenses. Variable expenses – also known as cost of goods sold – change based on the amount of product being made or sold and are incurred as a direct result of creating or acquiring the product. They can include:
- Machinery to create a product
- Wages for people who create the product
- Depreciation of the equipment used to create the product
- Utilities for the space where the product is created
For ecommerce business owners who don’t manufacture their own products, it’s more simple: your variable expenses are just how much you pay to purchase the product you’re selling.
Fixed costs are, like they sound, more stable and unlikely to change significantly over time. They can include:
- Office expenses
- Wages for employees not involved in creating the product
- Marketing expenses
- Employee benefit costs
How to calculate net profit margin
Net profit margin is a ratio that essentially tells you how much of every revenue dollar is left after accounting for expenses. It answers the question: at the end of the day, how profitable is your business?
You can calculate profit margin using either gross profit (revenue minus cost of goods sold), for gross profit margin, or net profit (revenue minus all expenses), for net profit margin. We’ll use net profit margin as an example here.
You calculate net profit margin by dividing your net profit (so your revenue minus all expenses) by your starting revenue number. Then, multiply the resulting figure by 100 to get your net profit margin as a percentage.
Net Profit Margin = Net Profit / Revenue x 100
Another way to visualize it:
Net Profit Margin = (Total Revenue – Total Expenses) / Revenue x 100
Why is net profit so important?
Net profit helps you understand not just how much money you’re bringing in, but how profitable you ultimately are – a critical metric for business owners to understand.
If you’re bringing in revenue but aren’t profitable (or profitable enough), you may need to evaluate your business model and strategies to see where you’re falling short – or develop a clear plan for growth.
If you are profitable, you want to be thinking about how you can use the money you have leftover to grow your business further – whether that’s increasing your marketing budget, investing in new opportunities or hiring more people.
Don’t forget these definitions:
- Net profit: Net profit is the money you have remaining after factoring in all expenses. It’s calculated as Total Revenue – Total Expenses.
- Gross profit: Gross profit, a similar metric, measures the money you have remaining after factoring in only cost of goods sold (it doesn’t account for other expenses like salaries, taxes or advertising). It’s calculated as Total Revenue – Cost of Goods Sold.
- Profit margin: A ratio that tells you the percentage of each revenue dollar that is retained after accounting for expenses. You can calculate profit margin using either gross profit (for gross profit margin) or net profit (for net profit margin).
How to improve net profit
Remove unprofitable products and services
Reduce overall direct costs
The bottom line? 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 key indicators of business success.
By closely and regularly monitoring ecommerce metrics, store owners can better understand their business performance and evaluate their progress toward sales and revenue goals – as well as drive better-informed business decisions and identify areas of improvement.
Improve net profit with Glew
Calculating net profit can be tricky for ecommerce stores, since it requires gathering data from so many different places. Calculating your net profit could mean switching between Google Analytics, advertising platforms, your ecommerce platform and more. With Glew’s multichannel analytics for ecommerce, discovering net profit is easy, since all your data is pulled into one central location. Glew also 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 for channels like Facebook, Google Ads, Instagram, email, affiliates and more. Glew’s ecommerce analytic dashboards help you connect the dots in your previously siloed data, allow you to access the KPIs you need in one central location.
To see the benefits of Glew firsthand, get started with a free trial.