How to calculate profit

The amount you will be asked to pay each month will be based on how much you have left after you pay any rent, food or utility bills. Note that you will be charged interest on these payments. 

As a small business, it’s crucial to understand how to calculate profit so that you know how well your business is performing. Read on to find out how to calculate profit for your business. 

The formulas to calculate profit

Profit simply means your business revenue minus any expenses. In other words, it tells you how much your business has earned once all costs have been deducted. The profit can either be kept in the business or reinvested to finance future growth. 

There are three main types of profit – gross profit, operating profit and net profit.

Gross profit

Your gross profit is your total sales minus your direct costs. These include the cost of raw materials and staff wages, for example. The gross profit shows you that you’re selling goods and services at a higher price than they cost you to produce. 

You can work out your company’s gross profit with the following calculation: 

• Revenue – direct costs = gross profit

Operating profit

Your operating profit is the income from sales once operating expenses, such as rent, utility bills and equipment, have been deducted. It excludes things like tax and interest and can show you how efficient your business operations are.

To work out your operating profit, carry out the following calculation:

• Gross profit – operating expenses = operating profit

Net profit

Your net profit shows that you’re making money once all expenses and taxes have been paid. This number comes last on a profit and loss statement which is why it’s known as the bottom line.

You can use the following calculation to work out your net profit:

• Operating profit – tax = net profit 

Example of profit calculation

Eddie runs a hair salon and wants to work out his profit. The figures below will help with his calculations:

• Total revenue = $150,000
• Direct costs (salon products and staff wages) = $50,000
• Operating expenses (rent, utility bills, equipment) = $30,000
• Taxes = $10,000

To work out his gross profit, Eddie needs to subtract his direct costs of $50,000 from his total revenue of $150,000, giving him a gross profit of $100,000.

To work out his operating profit, Eddie needs to subtract his operating expenses of $30,000 from his gross profit of $100,00, giving him an operating profit of $70,000.

To work out his net profit, Eddie needs to deduct taxes of $10,000 from his operating profit of $70,000, giving him a net profit of $60,000.

What is profit margin?

Your profit margin is represented as a percentage rather than a figure. It basically says the same thing as profit, but it can be useful to have a percentage if you want to compare your business performance to that of other companies. 

For example, if you want to work out your gross profit margin, you need to carry out the following calculation:

• (Gross profit / sales revenue) x 100 = gross profit margin percentage

To work out your net profit margin, it’s:

• (Net profit / sales revenue) x 100 = net profit margin percentage

Using the above examples, Eddie’s gross profit margin would be ($100,000 / $150,000) x 100 = 67%.

Eddie’s net profit margin would be ($60,000 / $150,000) x 100 = 40%.

What is a good profit margin?

A good profit margin varies depending on the industry, business model, and economic conditions. In general, a healthy profit margin is one that allows a company to cover its expenses, invest in growth, and generate returns for its stakeholders.

Typically, profit margins are expressed as a percentage of revenue, with higher percentages indicating greater profitability. However, a “good” profit margin can differ between industries. For instance, industries with high overhead costs, such as manufacturing or retail, may have lower profit margins compared to service-based businesses with lower operating expenses.

What defines a good profit margin for a business depends on its unique circumstances, competitive landscape, and long-term financial goals. Comparing profit margins to industry benchmarks and historical performance can provide context for evaluating a company’s profitability.

Calculating profit FAQs