How to Determine Profit

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Knowing how to determine your profit is an integral part of running a business. Without calculating exactly what your profit is, you might find yourself selling your stock faster than you can make it only to find at the end of the accounting period that you've lost money in the venture.

Calculate the total of all your sales for a specific period such as a month or a calendar quarter by adding the sales together. If you sell the same item at different prices, total each price point separately.

Figure your cost of sales by adding the cost of all materials and labor. If you want a profit figure for accounting or tax purposes also add your overhead to this sum.

Subtract the cost of sales from the sales total to determine your total profit. If you want to calculate your profit per item just divide the total profit by the number of items sold.

Tips & Warnings

  • Enter your sales and cost figures in a ledger daily or weekly to simplify your bookkeeping.
  • Profit, sales, and cost of goods are all needed not only for tax purposes but for presentations to management, investors, and loan applications.
  • Remember to check your calculations. It's always a good habit to add or subtract each column twice.
  • Meticulous bookkeeping is a necessity of every business. If you lack the time or knowledge to keep your own books, hiring a professional accountant is highly recommended.

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