Over the next few weeks, we’re going to talk a lot about key performance indicators (KPIs), also known as critical numbers. Today, we’ll be discussing a critical number/KPI that’s definitely one of the top three we need to measure and track—net profit.
First, what is net profit? It’s how much money that is left over after deducting all costs and expenses from your sales. Essentially, it’s the bottom line of your business.
So why is net profit important? Well, there are many reasons. The main one is obviously your return on investment (ROI), the money you receive for your hard work at the end of the day. That’s primarily why you started the business, right? But also, don’t forget that any profit can be reinvested back into the business to grow the company, make it bigger and better, support more employees, etc. Again, the reasons are numerous, and you’re probably quite familiar with them already.
Let’s move on to tracking your net profit. Now, I won’t go into too many details about tracking these KPIs, but I’m assuming you have some sort of financial accounting software, such as Quickbooks. Whether you do the books yourself or outsource it, you will find your net profit at the bottom of your income statement (also known as Profit/Loss statement). Depending on how often you tackle the books, you might be tracking net profit by the month, quarter, or year.
By the way, just looking at the number itself isn’t enough. You can be making great profit, but if you’re growing really fast you might still end up without any cash on hand. Additionally, if you use accrual basis accounting, you may show a lot of profit one month but no cash. Basically, people often correlate profit with having cash in the bank, and that’s not always the case.
Also, when we look at the big picture of net profit, it’s important to understand why we’re profitable (or why we’re not). Just knowing your bottom line isn’t that telling. Dig deeper. For example, perhaps you’re noticing that one of your products/services is making all the profit for the company. Maybe it is actually carrying all the other stuff. On the flipside, sometimes one major expense is dragging down your profitability. These kinds of data help you spot the necessary tweaks and adjustments that’ll make your company more profitable.
That’s it for net profit. Go out, track it, and dig deeper into it. Take action today, and have a better than amazing day.