A Business Amateur Vocabulary Lesson, Part 4: What is net profit?

Today I’m going to talk about a very business-y sounding concept called net profit.  It’s one of those terms that people in the business world talk about a lot and they sound very smart when they’re doing it, so I wanted to find out exactly what they meant.  My husband was kind enough to unpack it for me, and now I’m going to do my best to explain it here.

Net profit is the amount that a business makes after all their expenses have been paid.  It is also sometimes referred to as the bottom line–which makes sense to me, because if you’re taking a big number up top, and then subtracting a bunch of things from it, the number that comes out at the bottom is how much you have left.  According to www.investinganswers.com, the formula for net profit is just this:

Total Revenue -Total Expenses = Net Profit

Makes sense, right?  Now one can see how this is really important for businesses to think about.  If they only think about the total revenue, then they are going to think they have more money than they actually do.  We’ve all done it–you get a paycheck, and at first you think you have all of that money.  You immediately start thinking of all the things you could do with it.  But hopefully before you go and spend a bunch of it, it hits you that you actually don’t have all of that money.  Some of it (usually a lot of it) is already spoken for–you have to pay rent or a mortgage, pay for insurance for your car, groceries, whatever combination of things you have to do with it.  The money you have left over after you have made all of your payments for this or that (a.k.a. expenses), that figure would be your net profit.

A business operates very much the same way.  They have all sorts of expenses they have to take care of before they actually make a profit.  So they want to try and make more in total revenue, and also reduce their expenses as much as possible, in order for their net profit to increase.  Sometimes they might increase their expenses, and take a bit of a risk, hoping that eventually their total revenue will increase in the future as a result.  Either way, the bottom line (net profit) is what matters at the end of the day.

Seems like a simple enough concept to me.  Like most of the business words/phrases that I’ve been learning this week, it’s based on common sense.