Quick Guide on How to Calculate Profit for Small Businesses
Naturally, a business’s primary goal is to earn profit. However, if you want to earn big profits, you’ll need to properly calculate it first.
So, how does one calculate profit? Also, what are ways to increase my business profit?
Good questions! Read on and we’ll try to answer these!
What is profit?
Simply put, profit is a general term that refers to the amount of money you earn or gain from your business. We say “general” because there are specific kinds of profit, which we’ll be discussing later.
Your profit doesn’t just tell you the amount of money you’re making; it also serves as an indicator of your business performance—how successful or unsuccessful your business is.
To calculate profit, you’ve got to be familiar with a couple of accounting terms:
- Gross profit
This type of profit refers to the amount of money you earned from selling your products minus the expenses directly used in creating those products.
These expenses are known as the cost of goods sold (COGS) and include factors such as the costs of materials and labour. Because it only considers direct costs, indirect expenses such as distribution costs are not included.
To calculate gross profit, use this formula:
Sales – COGS = Gross Profit
- Net profit
Net profit is similar to gross profit; however, it takes into account the COGS plus all the other expenses obtained in the business in its equation.
This means other expenses such as utilities, rent, maintenance, marketing, and such are included.
To calculate your net profit, use this formula:
Sales – (COGS + all other expenses) = Net Profit
How to Calculate Profit
First, pick a particular time period. Let’s say you want to know your business profit for the month of January.
Then, make an inventory of all your expenses. This will include employee wages, rent, cost of raw materials, equipment, electricity, transportation costs, taxes, and more.
This is where bookkeeping comes into play. Make sure you keep accurate records of your business’s financial transactions, expenses, and so on.
This will make it easier for you to obtain the needed financial data to accurately calculate your business profit. Use the equations above to arrive at your net or gross profit.
In addition, make sure the data you’re using belongs to the time period concerned. For instance, don’t make the mistake of using expenses made during the month of April to calculate your business profit for the month of January.
Tips on How to Generate More Profit
Here are a few ideas to help your business increase its profit:
- Find ways to decrease expenses
Take note of areas where reducing expenses is possible.
You can start with utilities. Make sure you’re using energy-efficient equipment to optimise energy use.
This won’t just reduce energy costs but is also an eco-friendly action.
Another tip would be to utilise renewable energy by installing solar panels.
Meanwhile, have you tried finding new suppliers for your product materials? This could help you score better deals.
- Hire or outsource talent
Initially, calling on extra employees means extra expenses, right? But in the long run, this can actually benefit your business.
For instance, delegating accounting and bookkeeping tasks to someone else will free up your time and energy, which you can use for other important tasks that’ll contribute to your business growth.
- Make your services/products available online
Having an online presence (e.g. website) has plenty of perks.
You’ll be able to reach more customers, take advantage of digital marketing techniques as well as sell your products/services 24/7 anywhere without the need for a physical cashier.
Hopefully, this article has been a helpful resource for your business. While we mentioned three tips on how to increase your profits, yet another one is to focus on marketing.
Don’t know who to call to successfully market your business? We’ve got these articles for you:
- Best digital marketing agencies in Cork
- Best digital marketing agencies in Ireland
- Best creative agencies in Dublin
- Best digital marketing agencies in Dublin
- Best advertising companies in Galway