Many small business owners know little or nothing about calculating their business profits. A lot of them do not know the difference between gross profit and net profit. Worse still, most of them do not keep adequate or comprehensive financial record, which is the bases for calculating profit accurately.
Knowing how much profit your business makes is important for growth and success. Profit is the money left after you deduct all your costs from the money you earn. It helps you understand if your business is making or losing money. Here’s a simple step-by-step guide to help you calculate your profit:
Step 1: Understand the Types of Profit
Profit is the money your business keeps after covering its costs. There are three main types:
- Gross Profit: This is the money left after subtracting the direct costs of making your products or services from your total sales.
- Operating Profit: This is what remains after subtracting additional business expenses, such as rent, salaries, and electricity bills, from the gross profit.
- Net Profit: This is your final profit after subtracting all expenses, including taxes and loan repayments.
Step 2: How to Calculate Gross Profit
Gross profit shows how much money you make after covering the cost of making your products or services.
Formula:
- Total Sales is all the money you receive from selling your products or services.
- Cost of Goods Sold (COGS) refers to the money spent directly on making your products. This includes materials, labor, and production costs.
Example: If you sell 100 handmade bags at ₦5,000 each, your total sales = ₦500,000. If making the bags costs ₦200,000 (materials, sewing, and packaging), your Gross Profit is: ₦500,000- ₦200,000= ₦300,000.
Step 3: How to Calculate Operating Profit
Operating profit shows how much money is left after paying for everyday business expenses.
Formula:
Business expenses include rent, salaries, electricity, internet, and marketing.
Example: If your business expenses total ₦100,000, your Operating Profit is: ₦300,000- ₦100,000= ₦200,000.
Step 4: How to Calculate Net Profit
Net profit is the actual amount you keep after all costs, including taxes and loans, are removed.
Example: If your taxes and loan repayments add up to ₦50,000, your Net Profit is: ₦200,000 – ₦50,000= ₦150,000.
Step 5: Find Your Profit Margin
Profit margin helps you understand how much of your sales turn into profit. It is usually written as a percentage.
Example: (₦150,000/ ₦500,000) x 100= 30%. This means that for every ₦100 you earn, ₦30 is actual profit.
Understanding how to calculate profit helps you see how well your business is doing. Track your gross, operating, and net profit to make better financial decisions. Instead of spending all your profit, reinvest in business growth, save for emergencies, and spend wisely. Managing your finances well ensures long-term success and stability.
