How to Calculate Profit and Loss to Keep Your Small Business Accounts in Order

how to calculate profit

Profit is everything in the world of business. Especially for a small business. You can pride yourself on customer service, the quality of your product or service, or even your company’s philanthropic endeavors. However, all that is moot without profit.

Profit is what keeps the company afloat and able to grow and expand. Knowing how to calculate profit is imperative for small business and large business owners alike.

Keep reading to learn how to calculate total profit and why there is more to it than simply subtracting costs and expenses from your gross revenue.

What Is Profit?

A company makes money off the sale of a product or service, however, it takes money to make money. It costs money to make the product or to provide the service.

Profit is the difference between the cost of making the product and how much the customer pays for the product. Simply put, if your company sells a product that costs you $5.00 per unit to make and then sells the product for $10.00 the $5.00 difference is your profit.

However, calculating total profit for your company is more complicated than the simple example just given. In order to properly calculate the total profit a company will need a profit and loss statement.

Profit and Loss Statement

A profit and loss statement has more usefulness than to merely calculate profit. It can be used for tax purposes, or if your attempting to obtain a loan a bank will want to look at how well your company is doing.

A profit and loss statement shows the total gross revenue and the total expenses of the company for a certain period of time, typically a year. It shows how profitable your company really is, where problems may lay if any, and where to direct your attention in terms of expansion and growth.

A profit and loss statement contains the cost of goods, marketing and advertising expenses, payroll deductions, rent, utilities, and any other expenses made using your company’s expenses. These are all deducted from your gross revenue, this shows the total profits for the year for your company.

How to Calculate Profit

Now that we’ve covered what profit is and what a profit and loss statement along with its uses, it’s time to actually calculate your total profit.

As mentioned above profit is calculated by subtracting the cost the seller paid for an item from the cost the buyer paid the seller for the item. To show this better let CP be the cost the buyer pays, and SP is the cost the seller pays.

Profit = CP – SP

Now, what about a loss?

A loss is when the cost the seller paid for the item is greater then the cost the customer paid the seller. Using the formula above it would be seen as:

Loss = SP – CP

Now, what about how to calculate profit percentage?

Profit percentage = Profit / SP X 100

Loss percentage = Loss / SP X 100

Let’s take a look at an applied example of this at work.

A company sells bicycles. One of the bicycles they sell costs the company $299 per bicycle. The company sells the bicycle to their customers for $349. What’s the profit and profit percentage?

Profit = CP – SP

Profit = 349 – 299

Profit = $50

Profit percentage = (profit / SP) X 100

Profit percentage = (50 / 299) X 100

Profit percentage = .1672 X 100

Profit percentage = 16.72%

Now let’s take a look at profit and loss on a grander scale.

A company shows a gross revenue stream of $100,000 in a year. Their total expenses for the year (which includes payroll deductions, cost of goods, bills, and other expenses) were reported to be $62,000.

Profit = CP – SP

Profit = 100,000 – 62,000

Profit = $38,000

Profit percentage = (profit / SP) X 100

Profit percentage = (38,000 / 62,000) X 100

Profit percentage = (0.6129) X 100

Profit percentage = 61.29%

This shows the company is profitable for the year. Comparing two profit and loss statements from previous years will show how profitable the company is by showing how the profit percentage differs from year to year either growing or shrinking.

Accurate Profit and Loss Statements

Now that you know how to calculate profit and loss you’ll need to know how to properly keep an accurate profit and loss statement.

The profit and loss statement contains all the raw data that is used to calculate profit. However, there is a way to organize the profit and loss statement to ensure accurate financial records and easy readability.

How you design and layout your profit and loss statement is up to you, but it should contain the following sections:

  • Cost of Goods (merchandise and materials)
  • Operating expenses (rent, utilities, and payroll)
  • Revenue (the money the company makes off each sale)
  • Miscellaneous (any expenses which don’t fall into the previous two)

It is important to be as detailed as possible and to have a separate line for each expense which includes the date of payment, to whom it was paid, and the amount.

Your revenue, however, can be for the whole day or the whole week depending upon how you wish to track them.

Having a complete profit and loss statement will help to see how profitable your company is as well as making it easier to generate a quarterly or annual balance sheet for your accountant.

Understanding Profit and Loss Leads to Success

In the world of business profit is king. It shows growth, success, and helps investors and lenders trust in the continued success of your company and be willing to help your company grow and expand.

Knowing how to calculate profit is essential to understanding how well or poorly your company is doing. Knowing that profit is the difference between how much you make vs how much you spend is good, but as we’ve shown above there is more it than that.

Keeping accurate profit and loss statements is just as important as knowing how to calculate profit. If you find yourself wanting to learn more about calculating profit or don’t want to do all that math by hand. Contact us today and try out one of our calculators designed for you and your small business.

How to Calculate Profit and Loss to Keep Your Small Business Accounts in Order

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