- What is net profit?
- The difference between net profit and net income
- The easiest way to optimize net profit
- Modern digital tools that can be leveraged to boost net profit
Q: What is my business’s net profit? In addition, how can I optimize my company’s net profit?
A: Your business’s net profit is your total sales minus all of your operating expenses. Essentially, your net profit is the money left over after all costs are accounted for. The best ways to optimize your company’s net profits are by taking advantage of the available digital tools, strengthening your company’s infrastructure, and increasing your company’s profitability.
Despite the widespread transition to collaborative work environments in conjunction with studies about the productivity of healthy and happy employees, employers continue to struggle to fully optimize their employees.
According to Gallup, a surprisingly small 7% of American workers are fully optimized. With so much research pointing to the efficacy of engaged employees, why do business owners still struggle to retain quality employees and make the most out of the employees that stay?
Although there isn’t any one-size fits all answer to that question, many employers are focusing too much on net profit, struggling to cultivate a healthy working environment, or simply getting complacent.
But wait, how can your business succeed without focusing on net profit, especially with the economy being on such shaky ground? While many entrepreneurs feel that a “more is more” approach to their net profit formula is the answer, the truth is that net profit optimization is a much more strategic solution.
To truly understand how to get the most out of your net income, the first step is diving into net profit and all its moving parts.
Education on net profit vs. gross profit (or even just net profit meaning) will help you set your business up for long-term success, improved employee retention, and net profit optimization.
In this article, we’ll be taking a closer look at net profit as a whole, the difference between net profit vs. net income, the easiest way to optimize your business’s net profit, and some modern digital tools that can be leveraged to help boost net profit.
So, if you’re looking for better information about your net profit margin and how to get the most out of the money your business is bringing in – you’re in the right place. Keep reading for more!
- What is net profit?
- The difference between net profit and net income
- The easiest way to optimize net profit
- Modern digital tools that can be leveraged to boost net profit
What is net profit?
Before we dive into net profit optimization, let’s take a closer look at net profit as a whole.
First, net profit is the amount left over after deducting all of your business’s operating expenses. You calculate your net profit by taking your gross profits and subtracting all operating expenses beyond the cost of production.
Net profit can also be calculated from revenue by subtracting all expenses from your company’s total gross revenue.
To ensure that nothing gets lost in translation, let’s take a moment to examine some of these terms.
- Gross profit
- Operating profit
- Operating expenses
- Gross revenue
- Operating revenue
- Non-operating revenue
- Earnings after tax (EAT)
Gross profit
Gross profit is most easily described as your company’s total sales minus the COGS, or cost of goods sold.
An easy formula to remember when calculating your company’s gross profit is simply:
Total revenue – COGS = gross profit
Operating profit
For many small businesses, operating profit isn’t going to be much different from your net profit.
Operating profit is also referred to as earnings before interest and taxes, or EBIT. It is calculated as gross profit minus operating expenses, not including the deduction of any applicable interest payments or taxes.
This means that if your business has no outstanding loans or lines of credit, doesn’t pay a lot in taxes, or isn’t worrying about either, your operating profit won’t be too much different from your net profit.
Operating expenses
Your business’s operating expenses are any expenses incurred during normal, daily operations.
Any money you spend on normal business operations falls into your company’s operating expenses.
Gross revenue
Gross revenue is the sum of all the money your company generates. Any amount of money you bring in is added to your company’s gross revenue.
That said, your business’s gross revenue doesn’t take into account any of your operating expenses, so you can technically have impressive gross revenue without making any money.
Read more: Small Business Cost Savings: A Simple Way to Grow Your Income
We’ll touch on situations like this soon, but this is why net profit optimization is so important to your business’s long-term success.
Operating revenue
Operating revenue is money that your business accrues during its normal operations. I.e., if you’re running a digital clothing company, all of the money you make selling clothes online is accounted for in your operating revenue.
Non-operating revenue
As you can imagine, if operating revenue is the money your business makes in its normal operations, non-operating revenue is income generated outside of its primary operations.
This means that if you’re making any investments, purchasing real estate or assets, exchanging currencies, or buying other kinds of speculative assets, any income generated is added to your non-operating revenue.
Earnings after tax (EAT)
Technically, your company’s earnings after tax are the same as your company’s net profit.
Often, financial institutions, banks, and other potential lenders will look at your company’s earnings after tax to get a picture of your business’s financial standing. Your earnings after tax are also sometimes called your business’s “bottom line.”
Now that you’ve taken the time to familiarize yourself with the various aspects of profit itself, it’s time to move into the difference between net profit and net income.
The difference between net profit and net income
In many ways, net profit and net income are synonymous.
That said, you should still take the time to dig a bit deeper into net profit vs. net income. Thankfully, you’re in the right place.
Your net income is the amount of money your business makes over a set period, like a quarter. Your net income is also referred to as the net profit, so the two terms are essentially the same.
The key difference between the two is that “income” refers to the money that comes into the company and includes revenue as well as profit.
“Profit” always involves money beyond expenses, though the particular expenses deducted will vary by type.
Ultimately, net profit and net revenue refer to the same figure, but the terminology differs slightly.
Remember, these distinctions require some serious nuance, and the terminology is endless. Thankfully, modern business owners have more resources at their fingertips than ever before.
Don’t be afraid to take advantage of these tools, and remember that the internet exists for a reason – anything that is giving you trouble is just a search away.
Read more: Resources for Small Business: Top Free and Affordable Tools for Entrepreneurs to Grow a Business
With these differences in mind, you can start focusing on the best ways for your business to optimize its net profit.
The easiest way to optimize net profit
Unfortunately, there’s no perfect approach to optimizing net profits – as each business is slightly different.
Many business owners are under the impression that focusing entirely on net profit and trying to bring in as much money as possible is the best way to run a successful business, but that couldn’t be further from the truth.
Alternatively, the answer more often lies in improving management skills, creating a more collaborative workspace, and making use of modern tools to cut operational costs.
Read more: The Unexpected Secret to Better Small Business Management
Luckily, we’ve compiled a list of some of the best ways any business can optimize its net profit. Keep in mind there are multiple avenues to improving your net profit – sometimes, you just need to think outside of the box.
- Increase gross revenue
- Reduce operating expenses
- Cultivate a collaborative working environment
- Improve your company’s infrastructure
- Utilize a Virtual Office
Increasing gross revenue
The first way to increase your net profits is simply increasing gross revenue. If you increase the amount of money your business makes, chances are that you’ll also increase your net profit.
You should be aware though; this isn’t always the case.
Focusing solely on increasing gross revenue without worrying about your operating expenses can sometimes leave you in a bad position. You’re bringing in more money but spending it too fast for it to matter.
Although this is a powerful way to increase net profit, it isn’t easy. Making quick-payoff decisions like increasing prices can often lead to fewer sales, backfiring entirely on your company.
Reducing operating expenses
Reducing your company’s operating expenses is an excellent way to increase profitability, thereby increasing your net profit.
Doing this allows you to keep your prices the same while increasing your net income on each sale. This makes it easier to continue capturing and converting new leads, gives your business more room to breathe, and ultimately boosts your net profit effortlessly.
While cutting costs, you should try to avoid cutting out key employees while still keeping in mind the benefits of outsourcing.
Read more: How to Reduce Operating Expenses in Small Business
Cutting costs is a great way to increase net profitability, but you should be wary of cutting necessary aspects of your operation.
Remember, the goal is increasing your bottom line. If you’re making sweeping cuts, there’s a great chance you will wind up making it more difficult for your business in the long run.
Cultivating a collaborative working environment
In the past, businesses weren’t worried about creating a collaborative environment at all.
Instead, the focus was on a more authoritarian style of management. This authoritarian management style was harsh and unforgiving and enforced a strict hierarchy in the workplace.
As you can imagine, authoritarian working environments aren’t exactly a breeding ground for innovation.
Now, with more and more studies showing that a happy employee is a productive employee, businesses are more incentivized than ever to cultivate a healthy and collaborative environment at work.
You might be wondering how happy employees could lead to a higher net profit, but the answer is simple.
Hiring is costly. The onboarding process takes time and money. The Great Resignation made it painfully clear that the modern worker, if unhappy, is more than willing to search for a new position at a new company or strike out on their own.
Not to mention, paying for yearly raises and applicable bonuses for a few key employees will be far cheaper than hiring a new batch of core employees every couple of months.
In a collaborative environment, delegation and decentralization are king.
Rather than having one employee that makes all decisions and dictates the direction of each employee, all of your employees are given some level of decision-making. They and are told to focus on deadlines rather than an arbitrary “task at hand.”
With a fully functioning collaborative environment, you’ll be able to take a step back and let your business function as a living and breathing environment.
Collaboration means everyone is working together.
If deadlines are clear and the workflow is straightforward, your business will be operating at its most productive – meaning your net profit will increase regardless of whether or not you’re bringing in more money.
Improving your company’s infrastructure
Improvements to your company’s infrastructure are an underrated way to increase your net profit in the long term.
All too often, business owners are too focused on increasing revenue and scaling quicker than they can manage, despite not having a strong infrastructure to fall back on.
When you try and scale too quickly, you’re opening your business up for several problems.
First, when you don’t have a healthy infrastructure to rely on, you’re at the whim of your suppliers and, by extension, their suppliers.
This can lead to situations where customers are waiting unreasonably long amounts of time for their orders, getting the wrong orders, or even not getting what they’ve ordered at all.
Another problem your business might run into if you don’t have an adequate business infrastructure as you grow is falling victim to cyber-attacks.
New reports tell us that small businesses are three times more likely to be targeted by cybercriminals than larger companies.
This is likely because hackers and bad actors are aware that small businesses might not have the firewalls and security in place to defend against their attacks. Taking the time to beef up your business’s cyber security and thereby bolstering your company’s infrastructure is a great way to protect yourself from these kinds of attacks.
As you can see, the benefits of improving your infrastructure are far-reaching.
For good measure, we’ve included a brief list of actionable methods you can use to improve your business’s infrastructure over time.
Pay for high-quality cybersecurity
It’s worth spending a little extra to ensure your business won’t fall victim to scammers. If your company is hacked, you can lose valuable customer data as well as your company’s secrets.
In the aftermath of such an attack, regaining customer trust is going to be an uphill battle. It’s best just to protect yourself against these kinds of attacks as soon as you possibly can.
Educate your team
All too often, scammers are simply using impersonation to access private information and customer payment methods.
If you educate your team about these kinds of scams before they’re approached, they stand a much better chance of realizing the warning signs than if they were uneducated on what to look out for.
Create healthy relationships with suppliers
This goes for any business that deals with suppliers of any kind. If you’re going to be purchasing anything from one company with regularity, do your best to create a relationship with the individuals you’re purchasing from.
Not only will this help you get key information about your orders, if necessary, but it can also help you get better deals over time.
The better your business relationships are, the more legitimate your business will appear. Additionally, with solid relationships, you’ll have far more leeway than if you didn’t try to cultivate any relationship at all.
Plan ahead
A realistic blueprint for your business’s short and long-term goals might sound like a silly way to better your business infrastructure, but often the simple act of creating a detailed plan will illuminate issues you might not have seen while simultaneously pointing out areas in which your business excels.
Remember, there’s no such thing as too much planning. The more situations you plan for, the better prepared you are for anything you encounter.
As you can see, a strong business infrastructure is a perfect method of improving your overall net profit.
While these solutions might not have the most significant short-term results, the benefit of making these decisions will become increasingly apparent over time.
Fortunately, there are plenty of steps your business can take that will drastically cut operational costs and increase net profit in the short term.
Utilizing a Virtual Office
A Virtual Office is the ideal way to improve your business’s net profit, as a business’s biggest expense is rent.
The standard commercial lease lasts about three to five years. Not to mention, you’re responsible for paying a security deposit, monthly utilities, rent, and keeping the office stocked.
With a Virtual Office, you can radically reduce your monthly rent while maintaining all the professionalism and security of a traditional office.
Outside of maintaining professionalism, Virtual Offices provide a whole slew of additional benefits. We’ve listed some of these benefits below to help explain how using one of Alliance’s Virtual Offices can drastically improve your company’s net profit.
Work anywhere
With locations in every state and most major cities, your business can be anywhere. Wherever your business takes you, we’ll be waiting.
Although our offices are backed by physical space, that doesn’t stop you from working anywhere you see fit. Virtual Offices are built for remote work.
Privacy
Registering your business with your home address puts your information into the public domain. This means that anyone who is looking can easily access your personal information.
Because our Virtual Offices are backed by physical space, you’re able to register with a real address that prevents you from being forced to use your home.
Legitimize your operations
Not only are our addresses real, but they’re also professional and well-known too. You can register your tech company to an address in Silicon Valley or your financial services company to an address in Manhattan.
Your address is often the first thing potential customers or curious clients find when searching for your company. With one of Alliance’s Virtual Offices, you can ensure that they’re seeing an address that instantly legitimizes your business.
Cost-efficient
With plans that only require a 6-month minimum and monthly payments that make you question why you ever paid commercial rent before, you’re able to reinvest a considerable amount of money into your business.
If you’re just hoping to increase net profits, switching to a Virtual Office will drastically reduce your operating expenses, making your business inherently more profitable.
Virtual Offices offer a flexible and cost-effective alternative to traditional offices that drastically save on operational costs and lend to greater net profits. That said, Virtual Offices are just the tip of the iceberg.
Keep reading for more digital tools!
Modern digital tools you can use to boost net profit
Net profit is the money your business makes minus all the money your business spends. Many businesses focus on optimizing by increasing prices, but this is heavily risky.
Instead, the best way to boost net profit is to reduce operating expenses through a Virtual Office.
But what other tools does Alliance offer to help boost net profit?
Live Receptionists are a fantastic solution that helps you save money and reduce hiring expenses simultaneously.
If you’ve ever been the only one answering phones for your business, you understand how quickly things can get out of hand. Instead of risking upsetting a customer or missing an important piece of a conversation, consider using one of our Live Receptionists to deepen customer relations while personally screening and answering every call.
This way, you’re able to focus on your business’s core operations without having to make a part-time or full-time hire.
Alliance’s Virtual Phone is another great tool.
Another way to increase your privacy and keep your work-life balance in check, our Virtual Phones offer business owners a designated company phone number. Also, unlimited extensions mean that you have a streamlined way to onboard new team members and extend the same privacy to those individuals as well.
Further reading
- Resources for Small Businesses: Top Free and Affordable Tools for Entrepreneurs to Grow a Business
- The Unexpected Secret to Better Small Business Management
- How to Reduce Operating Expenses in Business
- Small Business Cost Savings: A Simple Way to Grow Your Income
Alliance Virtual Offices helps modern entrepreneurs find solutions to the countless problems experienced when running a business.
From bolstering your professionality to saving money on unnecessary hires, Alliance has something for all kinds of business owners.
Regardless of whether you’ve been in business for decades or are just starting to get your feet wet, Alliance Virtual Offices has tools that can help you save money, reduce operational costs, improve your company’s image, and connect with like-minded business owners.
Contact us today to see how Alliance can help your company grow and check out our Virtual Office Blog for further information about increasing net profits and more.
