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- Calculate net profit
- Sales and cost of sales
How to calculate net profit
Profit is determined by the money you get from sales, cost of stock (if you sell product/s) and of course all the expenses you incur. Keeping a close eye on each of these will ensure you are maximising the profit in your business.
To calculate the profit in your business you need to know that:
- sales consist of commissions paid / discounts given + cost of goods + gross profit
- gross profit is made up of variable + fixed expenses + net profit.
Sales, gross profit and net profit are the income earned by the business.
Cost of goods, commissions/discounts, variable and fixed expenses are business expenses.
A profit and loss statement shows planned and actual profit for your business. Our Financial statements template includes a profit and loss statement.
Improve profit by looking at the money you earn from sales.
- the number of customers
- the volume of goods or services existing customers buy
- the sales price.
If you have a good marketing strategy in place it will help you increase the number of customers or the amount they buy.
To increase your sales, objectives should include:
- ensuring as many potential customers as possible know about your business and what you have to offer
- existing customers are happy with your product or service and want to buy more of it.
A marketing plan lists your key marketing strategies, explains how each one will work, how much they will cost and how the strategies support each other.
Conducting market research will help you identify and define marketing opportunities and problems, and generate sales.
Review your sales prices regularly
Review your sales prices regularly to ensure you are covering all related costs and still making a profit. Find out how to calculate margins, mark-up and break-even amounts. This will help set the right sales price to meet your profit expectations.
Cost of Goods Sold
Ways to calculate the cost of goods in:
- retailing and wholesale is the difference between the stock at the start and end of an inventory reporting period. This would include stock sold in between
- manufacturing is finished-goods stock, plus raw materials inventories, goods-in-process stock, direct labour, direct factory overhead costs and goods sold in between
- service businesses is determined by labour used rather than sale of a product. So calculating the cost of goods sold is simpler due to the low-level use of materials required to earn the income.
How to calculate cost of goods sold
Expenses have an impact on profits. Review your expenses and look for ways you can cut back.
Separating expenses into categories will help you to calculate your costs. It also helps you to see where they are rising or can be reduced. Expense categories include:
- cost of goods sold. These are expenses relating directly to sales such as buying stock or components, freight costs if goods are shipped to your business or wages if a staff member works directly on producing an item for sale
- fixed expenses. These are expenses that stay the same when your sales increase such as rent, insurance, licensee fees, utilities etc
- variable expenses. These are expenses that go up or down based on the sales you make such as advertising, delivery charges and electricity if you're manufacturing.
Case Study: Get financially organised and grow your profits
Wendy Crawford, Peopleworks Cleaning Services.
'We now operate with confidence knowing how profitable each job is.'
Read more about how to Get financially organised and grow your profit.