The concept of net profit, its calculation, distribution and methods of analysis

From this article you will learn:

• What does the company's net profit indicate?
• What formula is used to calculate the net profit of any organization?
• How to correctly calculate profitability based on net profit
• How can you increase your net profit?

As you know, the main goals of any commercial enterprise are to make a profit and further business growth. Its effectiveness can be assessed using various indicators. A special place among them is occupied by net profit - the share of balance sheet profit that remains at the disposal of the company after all taxes, deductions, etc. have been paid. Knowledge of how to calculate net profit, what formulas to use for this and how to carry it out in accounting reporting is a must for any business leader.

What is net profit?

Commerce is inextricably linked with the concept of net profit. To get it, people found new enterprises, open production facilities, and constantly look for effective ways to increase the company’s income, and not only the owners and managers of companies are interested in maximizing net profit.

Net profit is one of the main final indicators of the activity of any business entity. This indicator includes the entire balance sheet profit of the company, from which the amounts of expenses (for staff salaries, managerial, production and others), taxes, fees and other contributions to the budget are subtracted.

The net profit belongs to the enterprise in full; it can be managed by renewing the company's funds from it, paying interest to shareholders, and expanding working capital. That is, this money can be spent on expanding the business, covering current needs, introducing innovations, updating equipment, etc.

Any enterprise regularly faces the need to calculate the amount of net profit, but the criteria for assessing the effectiveness of business management differ in different companies. Among them the main ones are:

• capital turnover;
• economic efficiency;
• increase in assets.

By calculating the company's net profit, we can accurately determine how much money remains in the ownership of the business entity.

Calculating the amount of net profit is also necessary for non-profit organizations (state-owned, budgetary, etc.), since the concept of operational efficiency is applicable to them as well.

A direct indication of the legislation regulating the work of Limited Liability Companies (LLC) and Joint Stock Companies (JSC) prescribes that net profit should be directed to:

• payment of dividends to shareholders (or distribution among members of the company);
• business development, increasing the volume of working capital;
• other company needs.

Thus, it is important for the accounting department of any joint stock company to know how to calculate net profit and also to pay dividends in full and correctly.

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Distribution of profits in LLCs and JSCs

LLC participants have the right to distribute profits or losses received in accordance with Law No. 14-FZ dated 02/08/1998. The net profit of the LLC is distributed by the general meeting of participants, but it does not have the right to make decisions if:

• the management company has not paid;
• the participant's share or part thereof has not been paid;
• there are signs of company insolvency;
• if the value of the LLC's net assets is less than the capital and reserve fund.

The main issues when distributing profits in an LLC may be the following:

• increase in the MC with a proportional increase in the share of participants;
• repayment of losses from previous years;
• dividend payment.

It is possible to increase the authorized capital only after full payment and when such a decision is made by 2/3 of the votes. The part of the profit distributed for the payment of dividends is divided among the participants in proportion to their shares in the management company, unless the charter establishes a different distribution algorithm.

An example of dividend distribution in Dom LLC

The company's participants are three domestic companies with a separate management company:

• LLC "A" - 10%;
• LLC "B" - 40%;
• LLC "V" - 50%.

The charter of Dom LLC states that profits are distributed equally between the participants. According to the decision of the meeting dated March 28, 2018, the net profit for 2021 is in the amount of 900,000 rubles. subject to distribution among participants.

Since the distribution of dividends is carried out not proportionally, but equally, each participant is entitled to 300,000 rubles. (900,000 / 3) less tax. If it were carried out in proportion to the shares in the capital company, then the calculation would be as follows:

– LLC “A” - 90,000 rubles. (900,000 x 10%);

– LLC “B” - 360,000 rubles. (900,000 x 40%);

– LLC “V” - 450,000 rubles. (900,000 x 50%).

The procedure for distributing profits in a joint-stock company is regulated by Law No. 208-FZ dated December 26, 1995. According to it, the joint-stock company uses net profit to create funds (including a special fund for the corporatization of employees), increase the authorized capital (by placing additional shares or increasing their value), and paying dividends. Making a decision on the direction of profit of a joint-stock company is the competence of the general meeting of shareholders.

The distribution of dividends is carried out on the basis of the announcement of their payment on outstanding shares, usually accepted based on the results of each quarter. However, the amount of dividends cannot be greater than the amount recommended by the board of directors. A JSC cannot declare the payment of dividends on shares if:

• the management company has not paid;
• shares have not been fully repurchased;
• there are signs of insolvency;
• The value of the LLC's net assets is less than the charter capital and the reserve fund.

The JSC is obliged to create a reserve fund, forming it with mandatory annual contributions (at least 5% of net profit) up to the amount provided for by the charter (at least 5% of the authorized capital).

Example of contributions to the reserve fund of Trio JSC

The JSC received a net profit for 2021 in the amount of RUB 900,000. The authorized capital is 2,000,000 rubles, the reserve fund as of 01/01/2017 was 80,000 rubles. The charter of the joint-stock company establishes the percentage of deductions - 7% of the capital up to the amount of 140,000 rubles. (2,000,000 x 7%).

The amount of deductions should be 63,000 rubles. (900,000 x 7%), but the total amount of the reserve will be 143,000 rubles. (80,000 + 63,000), i.e. it will exceed the maximum reserve size by 3 thousand rubles. (143,000 – 140,000). Therefore, the amount of 60,000 rubles will be allocated to replenish the fund.

Difference between net and retained earnings

Net income is not synonymous with retained earnings (although some believe that they are the same thing). They often differ quantitatively, are calculated differently and are recorded in accounting documents.

To reflect net profit, there is a separate line in the organization’s financial results statement. Each enterprise is required to calculate and record net profit at the end of the reporting period. Sometimes there is no profit as such, things are going badly, and then instead, a loss is reflected in the final documents.

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Retained earnings are recorded elsewhere - in the liabilities side of the balance sheet.

As a rule, the term “net profit” refers to the income received by a subject of economic relations during the reporting period (usually a calendar year). Retained earnings include income not only for the current year, but also for previous periods.

Let's look at an elementary practical example of how you can calculate the net profit of a store. The balance sheet of Vasilek LLC at the very beginning of the year, January 1, contains in the “retained earnings” column the amount of 3.2 million rubles, and the net profit for this year is equal to 750 thousand rubles. Thus:

• Retained earnings at the beginning of the reporting period - 3,200 million rubles.
• Net profit for the reporting year is 750 thousand rubles.
• Retained earnings at the end of the reporting year - 3.950 million rubles.

That is, the company’s net profit is always calculated for a specific reporting period, and retained earnings (instead of which there is sometimes a loss) represents the result of the company’s work from the moment of its opening, for the entire time.

Distribution of net profit

To contents

The procedure for distributing net profit is regulated by the charter of the enterprise. To do this, you must first organize a general meeting, where the meeting will decide where exactly to send the funds. They can make changes, adjust operations, increase payments, allocate funds for the purchase of equipment, and depreciation. If there is only one participant (for example, an individual entrepreneur), he himself decides where and how he will spend the money.

Fact! The decision to redistribute net profit is drawn up in the form of a protocol, which states how much it will be used and for what specific purposes.

For an accountant, this is the primary document, based on which business transactions in accounting will be carried out, as well as payments of the amounts listed in this document will be made.

After the owners’ decision on the redistribution of net profit is approved, the payments specified in it must be made. If the deadline is not specified, follow the time frame prescribed in the laws of the Russian Federation. Thus, for an LLC, the deadline cannot be more than two months from the date of adoption of the relevant decision. And for JSC, time limits depend on the status of the recipient. It is established by the board of directors.

Why calculate net profit?

The amount of net profit measures the efficiency of the entire enterprise. This parameter is required for various purposes by both external and internal stakeholders.

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How to calculate the net profit of an enterprise: formulas

The formula by which the enterprise's net profit is calculated (from sales or manufacturing of products) does not change its economic meaning, although various initial data can be used in it.

There are several ways to calculate net profit (NP):

• PE = revenue – taxes – expenses (administrative, production, transport, etc.) – cost of goods.
• PE = profit (before taxes) – taxes.
• PE = total profit (gross, financial, operating) – tax deductions.
• PE from sales = gross profit – selling expenses – administrative costs for selling goods.

The value of this indicator is determined by a number of factors:

1. total company revenue;
2. cost of production;
3. the amount of taxes;
4. the size of other costs and income.

In addition to net profit, accounting also uses the opposite indicator - net loss, or negative profit. Many enterprises are unprofitable at the end of the reporting year, although during this time they function quite successfully. It also happens that even in the absence of a large turnover, a business brings a huge net profit.

No matter what formula you use to calculate net profit, you end up with the same number. Typically, in practice, PE is calculated using a simplified formula, filling out the financial activity report line by line and receiving the required net profit in the final line.

How to calculate net profit using a simplified formula? Like this:

PP = B – SS – UR – KR + PD – PR – NP

In this formula:

• B - revenue;
• CC - cost of sales;
• UR, KR - administrative, commercial expenses;
• PD, PR - other income and expenses;
• NP - income tax.

All required source data is contained in the organization's financial performance report for the period of interest.

Thus, having access to data from financial statements, calculating net profit is not difficult at all. By this indicator you can judge how productive the company is. Of course, business owners and top managers are interested in any ways to increase net profit: expanding production volumes, reducing costs, etc. The sharp dynamics of this indicator (by large leaps) may arouse suspicion among potential investors and partners.

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Formula for calculating the net profit of an enterprise

To calculate net profit, it is necessary to make the difference between all costs and taxes of the enterprise. The formula has a single economic meaning, but can be reflected in different ways:

Net profit = Revenue – Cost of goods – Administrative and selling expenses – other expenses – taxes;

Net profit = Financial profit + Gross profit + Operating profit – Amount of taxes;

Net profit = Profit before tax – Taxes;

Net Income = Total Revenue – Total Expenses.

Net profit is also called “the bottom line” because it is reflected in the balance sheet as the last line. In the balance sheet before 2011, net profit was reflected in line 190 of Form No. 2 (Profit and Loss Statement); after 2011, the net profit indicator is reflected in line 2400.

Formula for calculating net profit on balance sheet

Let us describe in more detail the formula for calculating net profit through the balance sheet lines.

Net profit (line 2400) = Revenue (line 2110) – Cost of sales (line 2120) – Selling expenses (line 2210) – Administrative expenses (line 2220) – Income from participation in other organizations (line 2310) – Interest receivable (line 2320) – Interest payable (line 2330) – Other income (line 2340) – Other expenses (line 2350) – Current income tax (line 2410)

The figure below shows part of the balance sheet of the enterprise OJSC “Surgutneftekhim” and its reporting for 5 years. As can be seen from the balance sheet in Excel, in order to obtain net profit, you must first calculate: gross profit (marginal profit), profit from sales and profit before tax.

The impact of the company's main performance indicators on net profit

The net profit indicator consists of several components, which is reflected in various formulas for its calculation. Each of these components is also complex in itself. Thus, revenue may consist of several geographic segments or areas of work, but be that as it may, it all must be reflected in the formula by which net profit is calculated.

The cost structure varies greatly in different sectors of the economy and at specific enterprises. High costs, comparable to or exceeding revenue (due to expensive raw materials, labor-intensive production or obsolescence of equipment), exclude the possibility of obtaining a significant emergency.

Commercial and administrative expenses affect net profit quite predictably: the higher they are, the less emergency (how much less depends on the managerial talents of the head of the company, especially those related to the optimization of various costs).

If an enterprise has additional income in addition to its main activities, then its net profit can be significant even if sales bring zero income or even a loss. This situation will be discussed further.

Unsatisfactorily low profits from core activities are a common occurrence, especially at the initial stages of business development. Therefore, additional income is a serious help.

This could be, for example, investing in other enterprises or wisely investing free money in securities. The income received in such ways increases the amount of net profit of the enterprise. You can even improve the emergency ratio using a standard agreement with a bank, allowing the latter to use the balance of money in the company’s current accounts at interest.

For businesses that use borrowed money, interest on loans can have a significant impact on their bottom line, and this should be kept in mind when considering taking out a loan. Interest on borrowed obligations, even at market rates, can not only reduce the net profit of an enterprise, but also make it unprofitable, even leading to bankruptcy.

The impact on the emergency situation of third-party costs and income that are not related to the core activities of the enterprise cannot be underestimated. For example, renting out premises that are not currently in use or unnecessary equipment is an excellent source of additional income and contribution to the bottom line. The sale of assets not used by the company also provides an increase in private equity.

However, other expenses (their volume and structure) should be constantly monitored: when they increase, this often has a negative impact on net profit. Such an expense item could be (for example) charity.

How to calculate net profit on the balance sheet?

According to Order No. 66n of the Ministry of Finance of the Russian Federation dated July 2, 2010, the financial results of the enterprise’s activities are recorded on this report form.

This form has a special column numbered 2400 to reflect net profit (loss) for the reporting period.

Separately, we note that one of the reliable ways to calculate the amount of net profit is a calculation based on information from the company’s statements.

To calculate this indicator, use the following formula, where the numbers indicate the line numbers in the form:

2110 – 2120 – 2210 – 2220 + 2340 − 2350 – 2410, Where:

• 2110 corresponds to gross revenue;
• 2120 – cost;
• 2210 and 2220 - production and administrative expenses;
• 2340 – other income ( 2350 – similar expenses);
• 2410 – income tax.

Therefore, you must have a completely completed balance sheet form. The necessary data is taken from it, from which net profit is calculated.

But you can calculate the state of emergency using a simpler algorithm, simply by subtracting line 2410, corresponding to income tax, from line 2300 (profit before taxes).

Or use the turnover on account 99 in correspondence with account 84.

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Net profit analysis methods

Currently, two effective ways of analyzing net profit have been developed.

Factor analysis

The essence of the method is to search for causes, external and internal, and assess their impact on the dynamics of profit, expressed in rubles.

External factors affecting net profit include:

• inflation;
• changes in legislation;
• natural conditions of the region;
• demand structure;
• changes by suppliers to the conditions for the provision of materials and raw materials;
• transportation tariffs;
• rising prices for electricity and raw materials;
• competitive situation in the market;
• political factors.

Internal factors are:

• change in the number of company personnel;
• rent increases;
• change in product range;
• increase or decrease in production volumes;
• revision of prices for goods (services);
• the size of the tax burden.

The main factors determining profit include:

• cost of goods (services);
• their cost;
• sales revenue;
• administrative and commercial expenses.

Factor analysis of net profit is carried out in four stages:

1. The main factors influencing the emergency are selected.
2. Systematize and classify them.
3. Create models of relationships between them.
4. The influence of each of them is calculated and assessed.

Factor analysis formula:

∆ChP = ∆B + ∆SS + ∆KR + ∆UR + ∆PD + ∆PR – ∆SNP, where:

• ∆ – symbol of change;
• PE – net profit;
• B – revenue;
• CC – cost;
• SNP – current income tax;
• KR – commercial expenses;
• UR – management expenses;
• PD – other income;
• PR - other expenses.

Conducting statistical analysis of profits

Using this method, the following problems are solved:

1. Analyze the structure and initial volume of profit generation.
2. Study financial relationships.
3. Describe all areas of spending money.
4. Explore profit dynamics.
5. Assess the financial stability of the company.
6. Study the dynamics of the total BP.
7. Carry out an index analysis of the influence of each factor on the emergency situation.
8. Analyze the structure of the BP.

Assessing the overall financial condition of a business, its payback and profitability is impossible without a profitability analysis. It demonstrates the efficiency of using all the company’s resources – financial, labor, material, etc.

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How to calculate profitability based on net profit?

Indicators of economic efficiency of a business can be direct or inverse. The first are return coefficients: a conventional unit of result per conventional unit of cost to achieve it. The latter, on the contrary, start from a unit of result and demonstrate what volume of conditional costs is necessary to obtain it (capacity coefficients).

Profitability is considered one of the main characteristics of the efficiency of a company's economic activities. The influence of inflation on it is minimal; it can be expressed in the form of various ratios of income and expenses (but, as a rule, it is measured in coefficients).

Thus, profitability is an indicator of the efficiency of economic activity, characterizing how competently various resources (financial, material, human, etc.) are used.

There are two types of profitability indicators. In both cases, they are calculated as the ratio of one measure to another.

The main types of profitability for the business owner, investors, shareholders and other stakeholders are:

• Return on assets

This financial ratio reflects the profitability and performance of the company - the income that was received from each ruble of costs. Return on assets is calculated by dividing net profit by the average value of assets and multiplying the resulting result by 100%:

Return on assets = (Net profit : Average annual assets) x 100%

The initial data is taken from accounting documents: PE - from Form No. 2 entitled “Statement of Financial Results” (formerly called the “Profit and Loss Statement”), the arithmetic average of assets for the year – from Form No. 1 called “Balance Sheet”. If it is necessary to calculate the return on assets as accurately as possible, sum up the size of assets at the beginning and end of the year and divide this value in half.

Return on assets shows how much the actual profitability did not coincide with the expected one, and determines the reasons for this.

Using return on assets, you can compare the efficiency of enterprises operating in the same market niche.

Let’s say that in 2021 the company owned assets worth 2.698 million rubles, in 2021 – already 3.986 million rubles. Net profit in 2021 amounted to 1.983 million rubles.

Let's calculate the average annual value of assets by finding the arithmetic average between the amounts for both years. It is equal to 3.342 million rubles.

In 2021, return on assets was 49.7%.

Looking at these figures, we see that every ruble spent gave the company a profit of 49.7%. This is the profitability indicator.

• Profitability of fixed production assets (OPF)

This indicator, also called return on fixed assets, is calculated by dividing net income by the cost of fixed assets and multiplying the result by 100%:

Profitability of OPF = (PE: Average annual cost of fixed assets) x 100%

It shows what the real profitability is when using the fixed assets with which products are produced. All initial data for calculating the profitability of fixed production assets can be obtained from financial statements, namely: from forms No. 2 (net profit volume) and No. 1 (average size of fixed production assets).

Let's look at a practical example. In 2021, the company’s production assets were estimated at 1.056 million rubles, and a year later – already at 1.632 million rubles. In the same year 2021, the company showed a net profit of 1.983 million rubles.

Let's calculate the arithmetic average of the funds' values, it turns out to be 1.344 million rubles. Their profitability for 2021 will be 147.5% - this is the real profitability from using them.

• Return on sales

With return on sales, everything is simple: it reflects the share of profit in the company’s revenue. In fact, this is the profit ratio for every ruble earned. This indicator is expressed as a percentage and calculated for a certain period.

Sales profitability is the marker that a business leader first pays attention to. Based on data on sales profitability, companies change their pricing policies and optimize costs for selling goods.

Return on sales = (Profit : Revenue) x 100%

Each enterprise has its own unique profitability indicator. There cannot be generally accepted measures here, since both the range and competitive strategies of companies vary greatly.

You can calculate the return on sales ratio based on different types of profit. This gives rise to several variations of this indicator. It is most often calculated by gross or net profit, but operating return on sales is also common.

Return on sales by gross profit = (Gross profit : Revenue) x 100%

Return on sales based on gross profit is calculated by dividing gross profit by revenue and expressed as a percentage.

In turn, gross profit can be calculated by subtracting the cost of sales of a product from its revenue. This data is contained in form No. 2.

Let's look at a specific example. In 2021, the company received a gross profit of 2.112 million rubles, and its annual revenue was 4.019 million rubles. Return on sales, calculated based on gross profit, will be 52.6% - that is, every ruble earned by the company in 2021 consisted of 52.6% gross profit.

Operating return on sales = (Profit before tax : Revenue) x 100%

Operating return on sales is the ratio of profit (before taxes) to revenue. It also has a percentage expression. All initial information for the calculation is in form No. 2.

This indicator shows the share of profit in each ruble that the company earned, after taxation of revenue.

Let's assume that the company's profit in 2021, excluding taxes, amounted to 2.001 million rubles. The company earned only 4.019 million rubles in the same year. In this case, the operating return on sales will be 49.8%. This means that every ruble of money received, after the company has paid all mandatory taxes, contains 49.8% of profit.

Return on sales based on net profit = (Net profit : Revenue) x 100%

Return on sales based on net profit is the ratio of net profit to the amount of proceeds expressed as a percentage.

All initial indicators, as in other cases, are in form No. 2.

Let’s assume that the company received a net profit of 1.983 million rubles in 2021, having earned only 4.019 million rubles during this period.

If we calculate the return on sales based on net profit, it will be equal to 49.3%: every ruble earned by the company is 49.3% net profit.

In some cases, the return on sales ratio is referred to as the rate of profitability, since it reflects the share of profit of one type or another in the proceeds from the sale of products, provision of services or work.

When analyzing profitability of sales, keep in mind that its fall indicates a decrease in demand for the company's products and its competitiveness. In such cases, care must be taken to stimulate demand, develop new market niches, or improve the quality of the product (service) offered.

In factor analysis, profitability of sales is considered from the point of view of its influence on the price dynamics of cost and the final cost of goods (services, works).

To detect trends in changes in profitability, reporting and base periods are distinguished. The base year is usually taken to be the last year or the period when the company was at the peak of success and received the highest profits. Profitability ratios for both periods are compared.

Increasing profitability of sales can be achieved by increasing consumer prices for the product range or optimizing costs. When choosing a strategy of action and the corresponding communication, price, and product levers of influence on the situation, the following factors should be taken into account: fluctuations in demand, dynamics of market conditions, actions of competitors, and the possibility of reducing production costs.

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Features of profit distribution

It is fundamentally important to distribute profits correctly. This must be done in such a way that the efficiency of the enterprise increases, not decreases. Let's consider the basic principles of fund distribution:

• The company's profit is directed to the needs of the enterprise, and is also paid to the state budget. That is, taxes are paid on this money.
• Profit tax is paid at a rate set by law. She can't change.
• Most of the profits should be directed to the enterprise budget for accumulation. The rest goes to various company expenses.
• Proposed expenses must be agreed upon by the majority of LLC participants.

What accounting data is used when filling out line 1370 “Retained earnings (uncovered loss) ” when preparing annual reporting?

The enterprise must pay taxes and various contributions, after which the state cannot interfere in decisions on the distribution of money.

What can retained earnings from previous years ?

Let's look at which funds the money goes to:

• Savings fund . This fund accumulates funds to ensure the stable operation of the company and its independence from creditors. If a company has free funds of its own, it is not subject to bankruptcy. For example, if a company received very little income in one month and therefore cannot pay its existing debt, funds to pay off the debt are taken from the fund. It also finances research work, issue of shares, personnel training, and purchases new property.
• Consumption Fund . Funds from this fund go to social needs. For example, this could be payment of bonuses, financing of travel packages, purchase of medicines for employees, and various allowances.
• Reserve fund . Reserves are needed to reduce the risks of an enterprise when conducting various transactions. They will be needed in case of unforeseen situations. That is, if the company makes a small profit in one period, expenses can be covered from the reserve fund.

Part of the funds, as a rule, remains undistributed. This money is directed to the authorized capital of the company.

Specific areas of spending

There are two areas where net profit goes:

1. Accumulation of enterprise reserves. Increasing the volume of property.
2. Consumption. Spending money on specific needs.

Let's look at examples of spending net profit:

• Purchase of new equipment.
• Repair of existing equipment.
• Increasing the working capital of the enterprise, which is “eaten up” by inflation.
• Payment of loans and debts. Payment of interest on debt.
• Measures aimed at protecting the environment from pollution.
• Payment of bonuses.
• Organization of charity events.
• Calculation of motivating bonuses to employees.
• Payment of debts to creditors and banks.
• Payment of taxes.
• Payment of various sanctions.
• Retraining of employees.

Almost all of these expenses are optional. Spending occurs at the will of the enterprise management. First, the money is directed to priority purposes. For example, a company has only obsolete equipment. Therefore, first of all, funds should be allocated to updating equipment.