Definition
Net profit is the money left after all business costs are subtracted from sales: the goods you sold, rent, wages, utilities and everything else. It is what the business actually earned.
The formula
Start from gross profit, then take off rent, wages, power, phone, packaging, transport, card fees and repairs. If you pay yourself a wage, include it, or the figure will flatter the business.
A worked example
A mini-mart has gross profit of $4,000 for the month. Costs: rent $1,200, wages $1,500, electricity $400, other $300. Total costs = $3,400. Net profit = 4,000 - 3,400 = $600.
The shop looks busy and gross profit looks healthy, but only 15 percent of it, $600 of $4,000, is left. A 10 percent rise in rent or power would take a large bite. Gross profit shows whether your pricing works. Net profit shows whether the shop works.
Common mistakes
- Forgetting your own pay. Owner's time is a real cost.
- Leaving out irregular bills. Licences, insurance and repairs do not come monthly. Divide the yearly amount by 12.
- Counting stock purchases twice. The cost of stock is already in gross profit through cost of goods sold.
- Mixing profit with cash. Net profit is not the cash in the bank. See cash flow.
Shopkeepa's reports go as far as gross profit where cost is known. Running costs are not part of the first release, so keep those in a notebook or with your accountant.
Related terms
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