How to Calculate Earnings & Profits
Knowing how to calculate earnings and profits is a must for any business owner. Earnings, also called gross income, consist of the money left over after subtracting the direct costs of goods sold. Profit, on the other hand, is the money left over after all relevant expenses have been accounted for. While healthy earnings are vital to a growing business, profits are ultimately what will determine financial sustainability and the viability of your business model.
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Instructions
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Calculating Earnings
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Determine your net sale by adding all of your sales income for the period. If you are using accounting software, the program will most likely perform this computation for you. If you are using a spreadsheet to track your income, create a formula to add all of your daily, weekly, or monthly sales totals. Use all collected sales receipts from the period to confirm your net sales figure.
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Determine your cost of goods sold (COGS). Cost of goods sold consists of only the direct costs of your goods or services. For resellers, this is the cost paid for the merchandise. For manufacturers it includes the cost of all materials used in construction. Service providers' COGS is a bit more tricky to determine; it includes the cost of all materials used directly in the provision of the service.
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Subtract the cost of goods sold from your gross earnings to determine your earnings figure.
Calculating Profits
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Subtract selling and administrative expenses from your earnings to determine your operating income. According to businesstown.com, selling and administrative expenses include all salaries, utilities, rents, marketing expenses, and supplies. Other overhead costs, such as third party services and sales travel expenses are included in this category as well.
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Add all non-sales revenue, including interest income and capital gains, to your operating income. Include any extraordinary income for the period, such as the sale of a building or other capital equipment.
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Subtract all other expenses, including interest, depreciation, and capital expenditures for the period to arrive at your earnings before taxes.
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Subtract the total amount of taxes paid for the period to determine your net income, or profits. Consult your federal and state tax returns to determine the amount of taxes paid for a prior period. Multiply the applicable tax rates to your taxable income to determine expected tax expense for a future period.
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References
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