Total Profit Formula: How to Calculate Total Profit for a Business
March 19, 2020

March 19, 2020
How to calculate total profit boils down to a simple formula. But before you apply that formula to your business’ financials, it’s important to understand the different factors that play into profitability—and how to use them to determine the total profit your business is bringing in.
So how, exactly, do you do that? Let’s take a deep dive into how to calculate total profit like a pro—and use that information to take your business to the next level:
At first glance, profit seems like a simple concept. But spend a few minutes reviewing a profit and loss statement or your company’s other financial statements, and it’s clear that the concept of total profit might be a bit more complex than you originally thought. So, before we jump into how to calculate total profit for your small business, let’s quickly touch on what, exactly, total profit is.
Your business brings in a certain amount of money each year; that’s what’s called your gross income. But it’s not like you get to pocket every dollar that flows into your small business. Every company has a variety of business expenses from paying your employees to marketing your business to general operating expenses—and those expenses will have an impact on your bottom line.
Your total profit (or net profit) is how much money you have left over after you factor in all of your business expenses. In other words, it’s the percentage of your total revenue that you (and your business) get to keep.
As mentioned, having a clear understanding of your company’s cash flow, expenses, and net profit is a must for small business owners. But why is it so important?
There are a variety of reasons you need to have a clear understanding of your business’ total profit, including:
Clearly, understanding your total profit—and having a clear picture of your bottom line—is important. But how, exactly, do you calculate that number?
Let’s break each of those individual elements down a bit further:
Net sales are your company’s gross sales (also known as total sales) minus anything you had to pay out in returns, discounts, or other allowances. So, for example, let’s say your company does $1 million in sales in a given year. That’s your gross profit. But if you have a 10 percent return rate, you need to factor that in—so your net profit would be $900,000 ($1 million – $100,000 in returns).
Cost of goods sold (often shortened to COGS and sometimes referred to as “cost of sales”) is how much it actually costs your company to produce your products or services before selling them to your customers (including manufacturing, shipping, and some labor costs).
So, for example, let’s say you sell your product for $30—but it costs your business $7 to actually create that product. That $7 is your COGS.
This first part of the equation—net sales minus cost of goods sold—gives you your business’ gross profit. But if you want to get to your business’ total profit (or net profit) you have to take the equation one step further.
To get to your total profit, you also need to deduct any additional business expenses. This can include:
Once you subtract all of your additional expenses from your earlier figure of net sales minus cost of goods sold, voila! You have your business’ total profit.
Typically, businesses aren’t static; sales, costs, and expenses are constantly changing. And all those variables will play into your total profit at any given time.
There are a variety of factors that can impact your total profit (either positively or negatively), including:
Any of these factors can push your total profits higher or lower on any given day—and if you’re only calculating your total profit on a yearly basis, it could give you a skewed picture of your company’s actual profitability. For a clearer, more consistent number, make sure to calculate your total profits on a quarterly basis, which will give you a more comprehensive view of your company’s financials—and help you get a more accurate idea of your total profits.
When you look at your company’s income statement, you want to understand what every single number means and how it plays into your overall company’s profitability. And now that you know exactly how to calculate the total profit for your business, you have the formula you need to make sense of your business’ financials—and use that information to grow your business operations and take your company to the next level.