How do I calculate my business’s profit?
As a business owner or seller, it’s important to calculate your profit. Profit is a measure of your venture’s success and how much money you have to spend for yourself and your family.
Truth be told, some of us have forgotten the profit formula in our high school or college days even though it’s so simple.
But no worries; we’ll be reviewing it again here and give you a concrete example as well as tackle the various profit types. Afterwards, you should be able to apply this knowledge in the real world.
How to calculate my company’s profit?
To get the profit you make in your business, use this formula:
Profit = total revenue – total expenses
As you can see above, profit is the amount resulting from deducting your total expenses from your total revenue. There’s definitely no need to get an accountant to calculate this.
Let’s try an example:
You are planning to sell Air Jordan sneakers worth MYR180 each. So far, you’ve sold five pairs to friends and passersby, totalling to MYR900.
MYR900 is your total revenue because it’s the total amount you’ve earned from selling the sneakers. But this isn’t your profit yet; you would need to subtract your total expenses from it.
So expenses are composed of direct and indirect costs. Suppose you bought a pair for MYR100 from a supplier and plan to give a free 90s poster of the Chicago Bulls with the entire team on it worth MYR20.
Your direct cost would become MYR500 (MYR100 for each shoe x 5) and your indirect cost will be MYR100 (MYR20 for each poster x 5). Add them both together and you get MYR600, which is now the total expenses.
Plugging the figures into the profit formula, you’ll have something that looks like this:
Profit = MYR900 – MYR600
Thus, your total profit for selling the sneakers is MYR300.
How to Compute the Profit Margin
In addition, it can be useful to learn how to compute the profit margin. Profit margin is defined as the rate or degree to which your business makes money for each ringgit of sale.
For example, if you have a 50% profit margin, that means that you earned MYR0.50 for every MYR1 you sold.
To calculate the profit margin, you’ll need to use this formula:
Profit margin = [(revenue – cost of goods)/revenue] *100
Using the similar sneaker example earlier, the computation will be [(MYR900 – MYR500)/900] *100 = 44.44%. That means you’re earning MYR0.44 for every MYR1 of shoes you sell.
What are the different types of profits?
Profit comes in three types namely net profit, gross profit, and operating profit. But the formula we discussed earlier is essentially the same; only the calculation of the expenses differs a bit.
Now, let’s define each of these profit types in turn:
- Gross Profit – This type of profit is obtained by subtracting the cost of goods sold from the revenue.
It’s an important factor to check on the income statement since it calculates your profit before other expenses come in like overhead costs, credit card purchases, and tax.
- Net Profit – This is the amount that remains after all the costs have been deducted. It is vital to every business since it determines how much they are earning.
Another key difference in net profit is it factors in non-cash elements such as depreciation, amortization, and stock-based compensation.
- Operating Profit – If you’d want to know how efficient your business operations are, you should look at your operating profit.
This is computed by deducting operating costs from your gross profit. Note that interest expenses and taxes aren’t included in the calculation.