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 businessâ€™ financials, itâ€™s important to understand the different factors that play into profitabilityâ€”and how to use them to determine the total profit your business is bringing in.
So how, exactly, do you do that? Letâ€™s take a deep dive into how to calculate total profit like a proâ€”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 companyâ€™s other financial statements, and itâ€™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, letâ€™s quickly touch on what, exactly, total profit is.
Your business brings in a certain amount of money each year; thatâ€™s whatâ€™s called your gross income. But itâ€™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 expensesâ€”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, itâ€™s the percentage of your total revenue that you (and your business) get to keep.
As mentioned, having a clear understanding of your companyâ€™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 businessâ€™ total profit, including:
Clearly, understanding your total profitâ€”and having a clear picture of your bottom lineâ€”is important. But how, exactly, do you calculate that number?
Letâ€™s break each of those individual elements down a bit further:
Net sales are your companyâ€™s gross sales (also known as total sales) minus anything you had to pay out in returns, discounts, or other allowances. So, for example, letâ€™s say your company does $1 million in sales in a given year. Thatâ€™s your gross profit. But if you have a 10 percent return rate, you need to factor that inâ€”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 â€ścost 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, letâ€™s say you sell your product for $30â€”but it costs your business $7 to actually create that product. That $7 is your COGS.
This first part of the equationâ€”net sales minus cost of goods soldâ€”gives you your businessâ€™ gross profit. But if you want to get to your businessâ€™ 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 businessâ€™ total profit.
Typically, businesses arenâ€™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 dayâ€”and if youâ€™re only calculating your total profit on a yearly basis, it could give you a skewed picture of your companyâ€™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 companyâ€™s financialsâ€”and help you get a more accurate idea of your total profits.
When you look at your companyâ€™s income statement, you want to understand what every single number means and how it plays into your overall companyâ€™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 businessâ€™ financialsâ€”and use that information to grow your business operations and take your company to the next level.