As a business owner, managing the production cost and selling price are very critical. You need to calculate your production cost in detail since it will influence your profit. Calculates business profit is required because profit is necessary for your business to grow. Therefore, understanding the financial statement and what makes your business profitable is necessary for any business owners.

For some beginners, calculating profit could be a complicated task. Here, we share the simple way to calculate your business profit. First, you have to understand the following terms:

  1. Revenues
    Revenues are the fees earned from providing services and the amounts of merchandise sold. In the accrual basis, revenues are recorded during the delivering of service or merchandise. If the revenues earned are a main activity of the business, they are considered to be operating revenues. If the revenues come from a secondary activity, then they are considered to be non-operating revenues. For example, interest earned by a manufacturer on its investments is non-operating revenue. Interest earned by a bank is considered to be part of operating revenues.
  2. Expenses
    Considered as the money or cost spent to generate revenue. Expenses represent the cost of business operation, where the activities directed towards earning a profit. Expenses is divided into:
  • Operating expenses: expenses related to operational expenses, such as selling expenses, general and administration expenses, and other charges, but exclude selling price charges, and income tax.
  • Extraordinary expenses: the expenses is not part of a company’s regular operations.

5 Steps To Calculate Business Profit

Following are the 5 steps to calculate your profit. On this step, you should calculate the production cost item in detail and calculate the expenses in each of production process.

  1. Type of output cost:
    – Fixed cost: are expenses that have to be paid by a company, related to any of business activity. For example, rent, advertising, insurance and office supplies which tend to remain the same regardless of production output.
    – Variable cost: are those costs that vary depending on a company’s production volume, they rise as production increases and fall as production decreases.
  2. Preparing income statement
    In preparing the income statement, the report presents the income source and company expenses during the accounting period. To calculate the company’s profit loss:

    net income = gross profit – expenses

    This report is required in order to set the consumer’s selling price. The selling price will affect your profit and turnover.

  3. Calculate the selling price elements
    To set the reasonable selling price, the product base price should be identified first. The cost is calculated along with other expenses and the profit.The formula of cost of goods sold:

    Beginning inventory + inventory purchases – End inventory

    One of the critical points in setting the selling price of a product is, you need to consider the consumers’ buying power. If your target market is middle to low class, the increased price will influence your sales. Your customers will turn to your competitors.

  4. Identify the beginning inventory and end inventory
    In this beginning balance, you have to calculate the inventory beginning balance of raw material. The inventory beginning balance of raw material is the calculated total material inventory in the beginning of a period ( beginning of the month for monthly and the beginning of the year for annually).
  5. Calculating net sales
    The next step of calculating company profit is calculated net sales. Net sales usually refer to a company’s revenue net of discounts and returns. Sales in a trading company are one of the company’s incomes. It is important to record your company’s gross sales and deductions to find net sales. To calculate net sales:

    gross sales – deductions

    Understanding the steps to calculate your business profit is necessary to perform. It is the way to evaluate your business’ performance, whether your business is profitable or not.

Preparing the profit and loss statement for the business properly will encourage you to evaluate your business progress from time to time.