When it comes to managing a business, making profit is the primary goal. The profit is “gross revenue less total expenditures”, which is the amount of money a person receives during a specific accounting period. In general, the higher the profit value, the better. The profit can be reinvested in the company or retained by the owners.
Being able to determine a company’s profit is key to your ability to assess your financial situation and can also help you in pricing the goods and services you provide and paying your employees’ salaries among other issues.
To calculate your company’s earnings, follow these steps:
Calculate corporate profits
- Start by calculating the total revenue generated by the company:
To calculate business profits, you will need to add up the money that the company generates during a specified period of time (for example, quarterly, annual, monthly, or otherwise). Then add the total value of the sales of goods or services during a specific period of time. This value can be derived from multiple sources, including sales of goods and services, membership payments, or in the case of government agencies, taxes, fees and sales of resources.
Please note that you will need to deduct any refunds to customers for returned goods or disputes in order to obtain an accurate total revenue figure.
The following example makes it easier to understand the profit statement:
Let’s take for example a small publishing company that achieved last month sales of QR 20,000 to retailers in the region and sold copyrights and intellectual property rights for QR 7000 in addition to QR 3,000 earned from retailers for promotional material. If these figures represent all revenue sources, then total revenue is 20,000 + 7000 + 3000 = 30000 riyals.
- Calculate total expenses for the accounting period:
The company’s expenses can vary depending on the type of operations it undertakes. In general, the company’s total expenses represent the funds it spends in the accounting period during which the profits are analyzed.
In this example, we assume that the company’s expenses were QR 13,000 during the month in which it earned QR 30,000. In this case, we will assume that the QR 13,000 is the value of total expenditures.
- Deduct total expenditures from total revenue:
When you obtain accurate values for the company’s total revenue and expenses, calculating profits becomes easy. All you have to do is deduct expenses from revenue to calculate profits.
The obtained value represents the company’s profits during the highlighted time period. These funds are entirely for use as business owners wish. The business owner may want to reinvest funds in the company, use them to repay a loan, pay off investors’ profits, or simply save them.
In the following example, the profit calculation process is very simple since we have specific, accurate and final figures for revenues and expenditures. When deducting expenses from revenues, we will get 30,000 – 13000 = 17000 riyals in total profit. Since we are the owners of the company, we can take advantage of these funds to buy a new printing press or increase the number of printed books to increase profits in the long term.
It should be noted that a negative profit value is called “net loss.” Instead of saying that the company has achieved a “negative profit”, we usually say the company achieved has a “net loss” or “net operating loss”.
A net loss during a given period means the company spent more money than it earned.
All types of companies should avoid this type of loss. However, this loss cannot be avoided when starting a business. In the event of losses, the company can pay for operating expenses through loans or additional capital from investors.
A net loss does not necessarily mean that the company is in a deplorable condition (although this can be the case). Also, it is not common for a company to achieve losses while assuming initial one-time expenses (office purchases, brand establishment, etc.) until profits are realized. For example, Amazon lost 9 years (between 1994 and 2003) before starting to make profits.
- You can check the company’s income statement for revenues and expenses
While the profit account is quite clear, the most challenging part of calculations for a given accounting period is obtaining accurate information about the income and expenses. Fortunately, most companies should disclose the income statement that specify the company’s revenue and expenditure sources in detail.
The income statement usually includes detailed data about the company’s sources of income and expenses as well as the total net profit during the accounting period (it is usually found at the bottom of the income statement).
Using the data described in the income statement, the Company’s gross profit can be calculated accurately.