Net Profit - Construction

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 needs to be allocated" across ventures. "Almost by definition, overheads are costs that cannot be directly tied to any specific" project, product, or division. "The classic example would be the cost of headquarters staff." "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.

Example

Here is how you reach net profit on a P&L (Profit & Loss) account:

1. Sales Revenue = Price (of product) X Quantity Sold
2. Gross profit = sales revenue minus cost of sales and other direct costs
3. Operating profit = Gross profit minus overheads and other indirect costs
4. EBIT (earnings before interest and taxes) = operating profit + non-operating income
5. Pretax Profit (EBT, earnings before taxes) = operating profit minus one off items and redundancy payments, staff restructuring minus interest payable
6. Net profit = Pre-tax profit minus tax
7. Retained earnings = Profit after tax minus Dividends