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How to calculate profit and loss

Tracking profit and loss is paramount to running a successful business

On this page

  • Find out how to calculate net profit
  • Know how to review your sales
  • Work out how to calculate cost of goods sold  
  • Find out how to review your expenses

Calculate net profit

A profit and loss statement shows planned and actual profit for your business. If you don't have a template for creating your profit and loss statement, use our template below:

Financial statements template (XLSX 296.44 KB)XLSX icon

Profit is determined by:

  • the money you get from sales
  • the cost of stock – if you're selling a product
  • all the expenses you incur. 
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.

Keeping a close eye on each of these will ensure you're maximising the profit in your business, which can be calculated by:
  • sales – which consist of commissions paid / discounts given + cost of goods + gross profit
  • gross profit  which is made up of variable + fixed expenses + net profit
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Increase your sales

Improve profit by looking at the money you earn from sales, and increase:

  • the number of customers
  • the volume of goods or services existing customers buy
  • the sales price.

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.

If you have a good marketing strategy in place, it will help you increase the number of customers – or the amount they buy.

A marketing plan:

  • lists your key marketing strategies
  • explains how each strategy will work
  • identifies how much the strategies will cost
  • shows you how the strategies support each other.

Conducting market research will help you identify and define marketing opportunities and problems, and generate sales. 

If you don't have a template for a marketing plan, use our template below.

Marketing plan template (DOCX 140.2 KB)DOCX icon

Review your sales prices regularly

Ensure you're 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.

Calculate cost of goods sold

Cost of goods = opening stock + purchases - closing stock.

Manage your cash flow by carefully watching your stock levels and keep a close eye on your payments to suppliers and payments from debtors

Calculate cost by industry

  • Retailing and wholesaling;
    • 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.

Review your expenses

Expenses have an impact on profits. Review your expenses and look for ways you can cut back.

Separating expenses into categories helps calculate your costs. It also helps to identify where costs 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
    • 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
  • variable expenses – these are expenses that go up or down based on the sales you make such as;
    • advertising
    • delivery charges
    • electricity – if you're manufacturing.

Case Study: Get financially organised and grow your profits

'We now operate with confidence knowing how profitable each job is.'

Wendy Crawford, Peopleworks Cleaning Services.

Read more about how to Get financially organised and grow your profit.

Wendy Crawford, Kerri Painter and Kaylene Passmore sit at a desk with a computer screen in front of them