Calculate profit and loss | Victoria Enterprise

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The profit (or loss) of your business is the difference between your income and your expenses. Simply put, it’s the amount that goes into your business and the amount that goes out.

Income and expenditure

Depending on your business, your income will typically come from sales to customers.

The profit you make depends on your business expenses, which can include things like:

  • the cost of buying or manufacturing the goods
  • wages
  • The advertisement
  • bills
  • license fees

Keep track of these amounts when doing your finances to ensure that you are maximizing your business profits.

What is a profit and loss account (P&L)?

A profit and loss (P&L) statement is a summary of your business’s income and expenses over a period of time. It is one of the most important financial documents when running a business.

Prepare your P&Ls at regular intervals to get the most out of them – for example, at the end of each month, then at the end of the financial year. This makes it easy to see the results of your operations for this period compared to others.

Create your P&L with our handy template.

How to calculate and maximize your profit

Revenue generated by your business can be calculated as sales, gross profit, or net profit:

  • Sales is your business income before you pay business expenses, including cost of goods sold (COGS), staff rebates or commissions, and fixed and variable expenses.
  • Gross profit corresponds to sales after payment of COGS and staff discounts or commissions, but before payment of fixed and variable expenses.
  • net profit is the gross profit after payment of fixed and variable expenses.

You can maximize your profit by increasing your sales and reviewing and minimizing expenses.

Increase your sales

Improve your business sales by increasing:

  • number of clients
  • volume of goods or services that existing customers buy
  • selling price

Market to new and existing customers

A good marketing strategy will help you ensure that:

  • as many potential customers as possible know what you have to offer
  • existing customers are happy with what you offer and want to buy more

Conducting market research will help you identify and define marketing opportunities and issues and generate sales.

Outline all of this information in a marketing plan:

  • lists your top marketing strategies
  • explains how each strategy will work
  • identifies the cost of strategies
  • shows you how the strategies support each other

If you don’t have a marketing plan, use our guide and template.

Regularly review your selling prices

Review your selling prices every few months to make sure you’re covering all related costs and still making a profit.

Calculating your margins, markups, and break-even points will help you set the right selling price to make enough profit.

You can also check out our guide on how to set the right price for your products or services.

Analyze and minimize your expenses

Expenses decrease your profit, so review them regularly and look for ways to reduce them.

Separating expenses into categories helps calculate your costs. It also helps identify where costs are increasing or can be reduced.

You can break down expenses by:

  • fixed costs
  • Variable expenses
  • cost of goods to sell

Fixed costs

Fixed expenses stay the same regardless of how many sales you make, such as:

  • lease
  • Insurance
  • license fees
  • utilities

Variable expenses

Variable expenses increase or decrease depending on the sales you make, such as:

  • The advertisement
  • shipping cost
  • electricity – if you manufacture

Utilities are usually fixed. But electricity could be a variable expense for manufacturing companies if it depends on sales.

Cost of goods to sell

Cost of goods to sell or COGS are expenses directly related to sales, such as:

  • purchase inventory or components from suppliers
  • transport costs – if the goods are sent to your company
  • wages – if a staff member produces items for sale

Computation of cost of goods

Usually, COGS = opening stock + purchases – closing stock.

But the calculation of the COGS also depends on the sector and the type of company:

  • For detail and wholesale Business COGS is the difference between inventory at the beginning and end of an inventory reporting period, including inventory sold in the meantime.
  • For manufacturing companies, COGS is finished goods inventory plus raw material inventory, work in process inventory, direct labor, direct factory overhead, and goods sold in between.
  • For service The COGS of companies is primarily determined by the labor used rather than the sale of a product. This means that the calculation of COGS is simpler due to the low use of materials needed to earn the income.

Monitoring your inventory levels, payments to vendors, and payments from debtors can help you manage your cash flow.

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