How to Calculate Profit from Sales and Expenses
Understand how sales and business expenses work together to show whether your small business is actually making money.
Making sales is not the same thing as making profit.
A simple way to understand the difference is to look at the money the business earns and subtract the costs associated with running it.
The basic profit calculation
At its simplest: Profit = Income − Expenses.
If your business receives ₦800,000 and records ₦500,000 of business expenses for the same period, the simple difference is ₦300,000.
Start with your business income
Use the money earned by the business for the period you are reviewing. Depending on how you keep your records, make sure you are consistent about whether you are looking at sales made or payments actually received.
Record the costs of running the business
Include the business expenses relevant to the period, such as stock, delivery, rent, utilities, advertising, transport and other operating costs.
Example
- Sales/income: ₦1,200,000
- Stock purchases: ₦500,000
- Delivery: ₦80,000
- Advertising: ₦100,000
- Utilities and other costs: ₦70,000
- Total expenses: ₦750,000
- Simple profit difference: ₦450,000
Why regular expense tracking matters
If expenses are missing from your records, your business can appear more profitable than it really is. Consistent tracking makes the calculation more useful.
Profit and cash in the bank are not always identical
Timing matters. Customers may still owe you money, you may have paid for stock that has not yet been sold, or other transactions may affect your cash position. The simple calculation is useful for understanding the basic relationship between income and expenses, but it is not a substitute for formal accounting where that is required.
Keep your expenses alongside the rest of your business records instead of piecing everything together later.
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