Being able to determine profit is critical for everyone involved in the sales or other business areas. This accounting function will help you decide how to price your products and services in order to make an appropriate income. Learning to calculate profit requires access to the company's sales, cost of sales, and operating costs records, which can be found on the company's income statement.
Steps
Method 1 of 1: Calculate Profit
Step 1. Add up the total sales of company products or services for the relevant period
- You will need to subtract any amounts refunded to customers for returns or disputes in order to get a net sales figure.
- This value is known as the net income.
Step 2. Calculate the total cost of the goods sold
- There are several ways to calculate this value. For example, the FIFO (first in, first out) method, or "first in and first out", assumes that the first products arrived, or purchased from suppliers, will also be the first to be excluded, or sold to customers.
- Most smaller private companies use the actual cost of goods sold, referring directly to the cost listed on their suppliers' invoices for the products in question.
Step 3. Subtract the cost of goods sold from the sum of the net income
This represents your gross profit.
Step 4. Calculate the amount of operating costs incurred by the company for the period in question
- The term "operating costs" includes the total amount spent by the company to stay in business.
- Fixed operating costs include employee salaries, rental of the complex or payment of a mortgage, utilities and all other expenses that do not depend on the quantity of products or services produced by the company.
- Variable operating costs, on the other hand, are directly related to the level of production. Such costs may include, for example, shipping costs and commissions paid on sales.
Step 5. Calculate the operating profit by subtracting the total fixed and variable operating costs from the gross amount of profit
- You can also determine a net profit margin by calculating the percentage of a sale price that will ultimately result in a profit. Divide the operating profit by the net income and return this value as a percentage.
- For example, if net sales amount to € 1,000, cost of goods sold to € 300 and total operating expenses to € 200, the profit margin will be 50% (€ 1,000 - € 500 = € 500; € 500 / € 1,000 = 0.5).
