Bottom Line

 

Net profit also referred to as the bottom line, net income, or net earnings is a measure of the profitability of a venture after accounting for all costs. In a survey of nearly 200 senior marketing managers, 91 percent responded that they found the “net profit” metric very useful. In accounting, net profit is equal to the gross profit minus overheads minus interest payable for a given period. A common synonym for “net profit” when discussing financial statements is the bottom line.
Case Study:
Imagine to open an ice-cream shot. The shop in the first month of life manages to sell over 1,000 ice-creams that at an average price of $3, generates $3,000 in revenues. Is this good or bad? We don’t know yet. Why? We have to look at the bottom line of the business. In other words, are you going to make money once we will subtract from the revenues all the direct (such as raw materials) and indirect (such as rent) costs related to the business? Well, you will know the answer by looking at the bottom line. If that is positive, then you will have a net profit. If that is negative, you will have a net loss. In conclusion, the net profit tells you in part whether the business has been successful in creating additional money (which is not necessarily cash) for the business. One way to know whether the net profit is good or bad is to use a financial ratio, called “net profit margin.” What does this ratio tell you? This ratio tells you what percentage of your revenues is comprised of profits. The higher this ratio, the better. But how do you know when this ratio is high enough? Simple, you have to look for comparable companies. For instance, a tech company will generate higher net profit margin, compared to a retail company. Therefore, to avoid comparing apples to oranges, you have to know in which industry your business operates. Then, select a list (3 to 5 is enough) of similar businesses, and if the data is publicly available, you can assess whether your net profit margin is good enough.

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Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

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