Making a profit is one of the most important objectives of a business. Calculating your profit can not only help you determine your level of success, it also provides information about where your business is making money and where you are spending it.
You can calculate your business profit by subtracting your total expenses from your total revenue. To identify what the revenues and expenses are, start by choosing the time period you want to study. Businesses generally study a twelve month period, such as January 1 to December 31 or July 1 to June 30.
The selection depends upon:
- the nature of your business
- your personal preference
- possible tax considerations
Keeping records that are accurate, up-to-date, and easy to use is essential to obtaining a precise count of your profits.
CALCULATING YOUR TOTAL REVENUES
In order to determine what your total revenues were for the period being studied, consider the following points:
- What is the amount of gross revenue from the products or services that were sold? (Gross Sales)
- What is the amount of the products returned/credited to your customers?
- What is the amount of discounts given to your customer and employees? (Discounts)
- What is the amount of net sales from products and services? (Net Sales are your gross sales minus your returns, rejects and discounts.)
- What is the amount of income from other sources like interest on bank deposits, dividends from securities, or rent on property leased to others? (Non-operating Income)
- What is the amount of total revenue? (Your total revenue is your net sales plus your non-operating income.)
CALCULATING YOUR TOTAL EXPENSES
Expenses are the cost of the products sold and the services used in the process of selling products or services. Some common expenses for businesses are:
- cost of products sold (Cost of products sold is your beginning inventory plus your purchases minus the ending inventory.)
- wages and salaries (Include your own at the actual rate you'd have to pay someone else to do your job)
- utilities (electricity, gas, telephone, water, etc.)
- costs of web presence (online stores, website hosting, domain name registration)
- delivery expenses
- advertising and promotional costs
- depreciation (a decline in the value of assets and allocating the cost of assets to the periods of time they were used)
- taxes and licences
- interest charges for money owed
- bad debts (a loss to the business that is classified as an expense because the debt cannot be collected)
- professional assistance (accountant, attorney, information technology specialist, etc.)
Understanding your expenses is the first step toward controlling them and increasing your profit. After you have calculated your expenses, subtract the total amount from your total revenue and that figure is the profit your business made during the period you studied.
(Source: Canada Business Ontario)