Your business's profit (or loss) is the difference between your income and your expenses. Put simply, that's the amount that comes into your business and the amount that goes out.
Income and expenses
Depending on your business, your income will generally be from sales to customers.
The profit you make depends on your business expenses, which can include things like:
- the cost buying or making goods
- wages
- advertising
- bills
- licence fees
Keep track of these amounts when doing your finances to make sure you're maximising your business's profits.
What's a profit and loss statement (P&L)?
A profit and loss statement (P&L) is a summary of your business's income and expenses over a specific period. It's one of the most important financial records 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 and then at the end of the financial year. This makes it easy to see the results of your operations for that period compared to others.
Create your P&L with our handy template.
How to calculate and maximise your profit
The income earned by your business can be calculated as sales, gross profit or net profit:
- Sales is your business's income before you've paid business expenses, including the cost of goods sold (COGS), discounts or staff commissions and fixed and variable expenses.
- Gross profit is sales after paying COGS and discounts or staff commissions, but before paying fixed and variable expenses.
- Net profit is gross profit after paying fixed and variable expenses.
You can maximise your profit by increasing your sales and reviewing and minimising expenses.
Increasing your sales
Improve your business's sales by increasing the:
- number of customers
- volume of goods or services existing customers buy
- sales 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're offering and want to buy more of it
Conducting market research will help you identify and define marketing opportunities and problems, and generate sales.
Outline all this information in a marketing plan:
- lists your key marketing strategies
- explains how each strategy will work
- identifies how much the strategies will cost
- shows you how the strategies support each other
If you don't have a marketing plan, use our guide and template.
Review your sales prices regularly
Review your sales prices every few months to ensure you're covering all related costs and still making a profit.
Calculating your margins, mark-up and break-even amounts will help you to set the right sales price to make enough profit.
You can also check out our guide on how to set the right price for your products or services.
Reviewing and minimising your expenses
Expenses decrease your profit so review them regularly and look for ways to cut back.
Separating expenses into categories helps calculate your costs.It also helps to identify where costs are rising, or can be reduced.
You can break expenses down into:
- fixed expenses
- variable expenses
- the cost of goods for sale
Fixed expenses
Fixed expenses stay the same no matter how many sales you make, such as:
- rent
- insurance
- licence fees
- utilities
Variable expenses
Variable expenses go up or down based on the sales you make, such as:
- advertising
- delivery charges
- electricity –if you're manufacturing
Utilities are usually fixed. But electricity might be a variable expense for manufacturing businesses if it depends on sales.
Cost of goods for sale
Cost of goods for sale or COGS are the expenses that relate directly to sales, such as:
- buying stock or components from suppliers
- freight costs– if goods are shipped to your business
- wages –if a staff member produces items for sale
Calculating the cost of goods
Usually, COGS = opening stock + purchases − closing stock.
But calculating COGS also depends on the industry and type of business:
- For retail and wholesale businesses COGS is the difference between the stock at the start and end of an inventory reporting period, including stock sold in between.
- For manufacturing businesses, COGS is finished-goods stock plus raw materials inventories, goods-in-process stock, direct labour, direct factory overhead costsand goods sold in between.
- For service businesses COGS is mainly determined by labour used rather than sale of a product. This means calculating COGS is simpler because of the low-level use of materials required to earn the income.
Watching yourstock levels, payments to suppliers andpayments from debtors can help you manage your cash flow.
