The bottom line

Yesterday’s post broke down the calculation and importance of gross profit.

If you missed yesterday’s post, read it first. Then read today’s post. And if it all sounds essential but you’re not quite sure how it works, that’s precisely why I created the Partner Profit Program. You’ll get clear, actionable information in an easy-to-use dashboard. We’ll review it together on periodic video calls so you make strategic decisions to boost your agency’s bottom line. Think of it as having a CFO as a business partner without giving up any equity. Sound interesting? Click here to schedule a call, and I’ll give you all the details. -Now back to today’s topic.

Gross profit is what you have left after fulfilling commitments to your customers.

You can use that to cover the company’s general and administrative expenses and owner compensation, which I call indirect expenses, or you see as operating expenses or OpEx for short. (There are other kinds of indirect costs, too, including depreciation, amortization, and interest expenses. I’ll set those aside for now and return to them when I discuss EBITDA. Companies also have capital expenditures or CapEx for short, or investments in long-term assets. These are balance sheet transactions and do not directly affect the P&L.)

Net profit is the difference between gross profit and all indirect expenses.

It’s the final result of your profit and loss statement; thus, we refer to it as the “bottom line.”

You can also calculate net profit margin (NPM), or net profit divided by total revenue, to make comparisons with other companies more accessible.

At first glance, net profit tells us whether the business brings in enough revenue to cover all its expenses. A company that can’t pay its bills will either rely on external funding, weakening its value, or soon go out of business.

Reviewing net profit, especially in comparison with gross profit, can reveal where a company might be overspending and leaking cash. Or it may have significant enough profits to justify hiring additional administrative staff to reduce the owner’s day-to-day workload.

Different industries have different benchmark expectations regarding gross profit margin (GPM) and net profit margin. Most service businesses, including creative agencies, aim for an even split: one-third of revenue to direct costs (67% GPM), another third to indirect costs (33% NPM), and the final third to owners. This is a rough guideline and could vary significantly depending on the company’s growth stage, business model, and compensation policy (as labor costs tend to drive overall costs).

Managing NPM requires first tracking NPM. A monthly profit and loss (P&L) over a range of months (usually 6–18) provides an excellent historical view of profitability.

Increasing NPM depends on interpreting where and how your business can be made more profitable. Typical recommendations include the following:

Review your pricing strategy Increase prices. Offer recurring services, if you don’t already, can provide steady subscription revenue at relatively lower direct costs than project-based revenue.
Automate and eliminate Streamline processes by finding opportunities to automate or eliminate manual steps.
Reduce indirect costs Negotiate better rates with vendors, find new vendors, and trim unneeded or ineffective staff.

Net profit generally measures the overall financial performance and management of a business. Tracking and improving net profit allows you to make informed decisions about pricing, expenses, and investments and position your agency for long-term success.