In running a business, profit is king. Profit is defined as total income minus total expenses, ie the amount of money "earned" by a business during a certain calculation period. In general, the more profit you make, the better, as profits can be reinvested into the business or kept by the business owner. Being able to determine profits in a business accurately is an important part of a business, in order to be able to consider the level of financial health of a business. Determining profits can also help in determining the selling price of goods and services, determining employee salaries and others. See step 1 below to start calculating your business profit.
Step
Part 1 of 2: Calculating Business Profit
Step 1. Start with the price to determine the total operating income
To find a business profit, start by adding up all the money that will be used to run the business in a certain time (eg quarterly, yearly, monthly, etc.). Add up the number of sales of goods or services during that time period. This can come from a number of sources, including products sold, services rendered, membership payments or in the case of government agencies, taxes, fees, sale of rights to resources, and so on.
- Note that you must deduct the amount of cash returned to customers for returned goods ordered to get an accurate figure for total revenue.
- The process of calculating business profits will be easy to understand if you use an example. Suppose you have a small business that has just been started. In the last month, you sold $200,000,000 book value to a retailer. In addition, you also sell your rights to one of the property's assets for Rp. 70,000,000 and receive Rp. 30,000,000 from a retail book dealer as an official promotion. If all of these are your sources of income, then it can be said that the total income earned is IDR 200,000,000 + IDR 70,000,000 + IDR 30,000,000 = IDR 300,000,000.
Step 2. Calculate the total operating costs during the calculation period
The costs incurred in the business can vary, depending on the type of operation used. Generally, the total cost of business represents all the money used to conduct the business during the calculation period under analysis. See the section below for a detailed breakdown of the types of costs that can occur while running a business.
For example, let's say your business spends IDR 130,000,000 for 1 month to get IDR 300,000,000. In this case, Rp130.000.000 is the amount of income.
Step 3. Subtract the total expenses from the total income
You can calculate profit easily if you find accurate values for total revenue and expenses. Simply put, subtract expenses by income to get a value gain. The value earned for business profits represents the amount of money earned in the time period you specify. The use of this money is the authority of the business owner. They can use it to reinvest into the business, repay loans, distribute to shareholders, or save.
In the example above, because you have accurate figures of your income and expenses, calculating business profits will be very easy. Subtract expenses from income, or IDR 300,000,000 - IDR 130,000,000 = IDR 170,000,000 as profit. Since you are the owner, you can use this money to buy new printing presses for your publishing business, increasing the number of books that can be printed and potentially increasing profits in the long run.
Step 4. To note that the negative value of profit is called "net loss"
Instead of calling it a "negative profit" business, we usually call it a "net loss" or "net operating loss (ZERO)". If your efforts are paying off, it means it's time to focus, because your efforts are costing you more money than they can earn. In almost every business this should be avoided, although at the beginning of the business running it is sometimes difficult to avoid. An example of ZERO is that a business must pay operating costs by borrowing or obtaining additional capital from investors.
a net loss does not necessarily mean the business is in a difficult position (although this is a "probably" cause). It's not uncommon for businesses that suffer losses when incurring one-time costs at first (buying an office, issuing a trademark, etc.) eventually turn a profit. For example, Amazon.com lost a lot of money for 9 years (1994-2003) before everything turned into a profit
Step 5. Look carefully at the income and expenses on the operating income statement
Since the actual calculations used to find profits in a business are very simple, the most difficult part of calculating profits for a given period is finding accurate income and expense information. Fortunately, most businesses are required to open a accounting document called an income statement, which lists the company's sources of income and expenses in detail. The income statement usually contains a detailed statement of the company's sources of income and expenses as well as the "sum" value of the total profit during the calculation period (it is said so because this value is usually found at the bottom of the income statement). By using income statement information, you can calculate the total profit of your business accurately.
Next, you will explore the steps for breaking down the sources of income and expenses of a business as it is done on the income statement
Part 2 of 2: Breakdown of Income and Expenses
Step 1. Start with the sales value of your business
Although a company's profits are usually expressed as income minus expenses, the two ubu units are usually calculated from various sources: income and expenses themselves. So, if you start calculating business profits from scratch, you will be working with multiple values of income and expense sources, rather than a single value from each source. In this section, you will break down the income and expenses of the business to calculate the profit piecemeal. Starting from the sales profit; the amount of money the business generates from the sale of goods and services, less returns, discounts, and receipts for lost or damaged goods.
To illustrate the process of breaking down income and expenses in a business, take a look at the following case examples. Let's say you have a small company that produces sneaker end products. In these three months, let's say your sneaker sales were $3,500,000,000. However, in connection with any withdrawals, you will have to pay a refund fee of Rp100,000,000. You will also have to pay IDR 20,000,000 for returns and other unrelated rebates. In this case, your sales profit is IDR 3,500,000,000 - IDR 100,000,000 - IDR 20,000,000 = IDR 3,380,000,000.
Step 2. Subtract the cost of products sold (COGS) to get the gross revenue
In business, there must be money spent to make money. Products have to be made from raw materials, and since raw materials or workers won't want to make products for free, this means you'll need to pay money to make the products you want to sell. This cost is called the cost of products sold, or COGS. Included in COGS are raw materials and labor costs that are directly related to the manufacture of the product being sold, but do not include indirect costs such as distribution, shipping, and wages of salespeople. Subtract COGS from net sales to get gross revenue.
- In the sneaker company example, your company must buy fabric and rubber to make sneakers and also pay factory workers to assemble raw materials into usable products. If you spend IDR 300,000,000 to buy cloth and rubber and pay factory workers IDR 350,000,000 for these 3 months, your gross business income is IDR 3,380,000,000 - IDR 300,000,000 - IDR 350,000,000 = Rp2.7300.000.000.
- It should be noted that businesses that do not physically sell products (for example, consulting firms), use a similar value to COGS which is also called cost of revenue. Cost of revenue includes expenses directly related to the effort to generate sales, such as direct labor costs and sales commissions, but does not include employee salaries, rent, equipment, and so on.
Step 3. Reduce all operating costs
Companies do not only spend money to sell products and/or services to consumers. The company also has to pay employees, marketing effort costs as well as electricity costs. These costs are usually called operational costs and are determined from the costs needed to keep the business running, which are not directly related to the income and implementation of the product or service being sold.
For the sneaker company example, let's say that you pay employees who are not factory workers (marketing, managers, etc.) for a total of IDR 1,200,000,000. You also pay $100,000 for rent and equipment, and $50,000 to place an ad in a magazine. If all of these are operating costs, the calculation becomes Rp2,730,000,000 - Rp1,200,000,000 - Rp100,000,000 - Rp50,000,000 = Rp1,380,000,000.
Step 4. Reduce depreciation/amortization expense
After deducting the operating costs of the business, you will also reduce the costs associated with depreciation and amortization. Depreciation and amortization are related (but not similar) to cost. Depreciation represents the decrease in the value of tangible assets such as equipment and equipment due to the use and wear and tear of the asset's life from normal operations, while amortization represents the reduced value of intangible assets such as patents and copyrights from the life of the asset. Reducing these costs after deducting operating costs will give you value for operating income.
In the sneaker company example, let's say that the machine used to manufacture the sneaker costs IDR 1,000,000,000 and has a service life of 10 years. Assume depreciation on the machine is $100,000 per year, or $25,000 per 3 months. If this is the only markdown cost you have, reduce it to IDR 1,380,000,000 - IDR 25,000,000 to Rp1,355,000,000.
Step 5. Also reduce other costs
Next, you will calculate extraordinary costs that may not be necessary for the normal course of business. Such costs include interest on loans, repayment of debts, purchase of new assets, and others. These can all vary for each accounting period, especially if the company's business strategy changes.
Let's say your sneaker company is still paying off the loan you used to start the business. In the last 3 months, you paid IDR 100,000,000 for the loan. You also buy a new shoe making machine for Rp. 200,000,000. If all of this describes the extraordinary expenses incurred for 3 months, you can calculate $1,355,000 - $100,000 - 200,000,000 = Rp1,055,000,000.
Step 6. Add one-time revenue
In addition to earning other extraordinary values, a business can also earn one-time income, such as business deals with other companies, sales of tangible assets such as equipment, and sales of intangible assets such as copyrights and trademarks.
Say, in the last 3 months you sold an old shoe making machine for $50 and allowed your company logo to be used by another company as an advertisement for $100,000. In this case, you can add one-time revenue to your business so that: IDR 1,055,000,000 + IDR 50,000,000 + IDR 100,000,000 = IDR 1,205,000,000.
Step 7. Subtract taxes to find net income
Finally, when all revenues and deductions have been calculated, the final cost that is usually deducted from the operating income shown on the income statement is the business tax. It should be noted that a business's taxes can be subject to more than one government regulation (in short, a business may pay taxes to the state as well as to the local government). In addition, the price of taxes paid may change depending on where the business is run and how much the business makes a profit. Once you deduct your tax-related expenses, the value you earn is already net income from the business, and the income can be used at the discretion of the business owner.
In the example above, let's say that based on pre-tax income levels, your company is subject to tax of IDR 300,000,000. Subtract IDR 1,205,000,000 - IDR 300,000,000 = Rp905,000,000. This value describes the net income from the business you are doing, which means the profit you get is IDR 905,000,000 for 3 months. Not bad numbers!
Tips
- Make sure you calculate all operating costs. Advertising, business cards, and long-distance calls won't cost you much, but all of this value will accumulate quickly.
- It should be noted that you can determine the net profit margin by calculating the percentage of the selling price that ends up being a profit. In other words, divide operating profit by net income and convert the number to a percentage. For example, if the net sales are IDR 10,000,000, the COGS value is IDR 3,000,000 and the total operating costs are IDR 2,000,000, the profit earned is IDR 10,000,000 - IDR 5,000,000 = IDR 5,000,000; IDR 5,000,000 / IDR 10,000,000 = 0.5 = 50%.
