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Definition

Net profit is a measure of the profitability of a venture after accounting for all costs. In a survey of nearly 200 senior marketing managers, 91% responded that they found the "net profit" metric very useful.[1]

Purpose

How does a company decide whether it is successful or not? Probably the most common way is to look at the net profits of the business. Given that companies are collections of projects and markets, individual areas can be judged on how successful they are at adding to the corporate net profit.

Construction

Net profit: To calculate net profit for a venture (such as a company, division, or project), subtract all costs, including a fair share of total corporate overheads, from the gross revenues or turnover.

      Net profit ($) = Sales revenue ($) - Total costs ($)

Net profit is a measure of the fundamental profitability of the venture. It is the revenues of the activity less the costs of the activity. The main complication is when profit needs to be allocated across ventures. Although it is theoretically possible to calculate profits for any sub-venture, such as a product or region, often the calculations are rendered suspect by the need to allocate overhead costs. Because overhead costs generally don’t come in neat packages, their allocation across ventures is not an exact science.

References

  1. ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc. <http://www.amazon.com/Marketing-Metrics-Definitive-Measuring-Performance/dp/0137058292>

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