Net Profit
Net Profit = Operating profit less the returns to outside capital (and other non-operating expenses).
As the returns to lenders of fixed capital (interest, rent and leases) are deducted from operating profit in the calculation of net profit, it therefore represents the return to the owner’s capital. Net profit minus income tax minus personal consumption (above operators allowance if it has already been deducted from operating profit) = change in equity. Net Profit is available to the owner of the business to pay taxes or to provide living expenses (consumption) or can be used to reduce debt. (See figure 27)
When net profit is expressed as a percentage return to the owners capital it indicates the efficiency of the use of the owners capital invested in the farm business.
Figure 30 shows a typical calculation for the percentage return on total capital, one of the main efficiency criteria for a beef business. It is calculated by dividing the operating profit by the total capital managed. The percentage return on equity is calculated by dividing the net profit by the owners’ equity and represents how well the owner’s capital preformed.
