How to Calculate Profit for a Small Business
Profit is what is left from your sales after you pay for everything it took to make them. To calculate profit for a shop, work in three layers: sales minus the cost of the goods sold gives gross profit; minus running costs gives operating profit; minus interest and tax gives net profit.
The hard part is not the subtraction. It is using the right numbers. Cash in the bank, money in the drawer and profit are three different things, and mixing them is how shops that "sell well" end the month with no money. This guide uses one full month for a made-up shop so you can follow every figure.
The profit formulas
| Step | Formula | What it tells you |
|---|---|---|
| Gross profit | Sales − cost of goods sold (COGS) | What your products earn before running the business |
| Operating profit | Gross profit − operating expenses | What the business earns from its normal activity |
| Net profit | Operating profit − interest − tax | What is left for the owner or for growth |
Cost of goods sold counts only the cost of the items you actually sold, not everything you bought:
COGS = opening stock + purchases − closing stock
Operating expenses are the regular costs of running the business: rent, wages, electricity, phone, transport, packaging, payment fees and similar. If you want a list to work from, see small business expenses you should track.
Worked example: one month for a small shop
All figures below are made up to show the method. Use your own.
Step 1: Sales. The shop sold $12,000 in the month, of which $1,500 was on credit (customers have not paid yet).
Step 2: Cost of goods sold.
| Amount | |
|---|---|
| Opening stock value (1st of the month) | $3,000 |
| + Purchases during the month | $7,500 |
| − Closing stock value (end of the month) | $3,300 |
| = COGS | $7,200 |
Step 3: Gross profit. $12,000 − $7,200 = $4,800, a gross margin of 40% ($4,800 ÷ $12,000). To turn a profit into a percentage, see how to calculate profit margin.
Step 4: Operating expenses.
| Expense | Amount |
|---|---|
| Rent | $1,200 |
| Helper's wages | $900 |
| Electricity and phone | $250 |
| Transport | $300 |
| Payment fees | $120 |
| Packaging and small items | $130 |
| Total | $2,900 |
Step 5: Operating profit. $4,800 − $2,900 = $1,900.
Step 6: Interest and tax. Loan interest of $100 (tax left out for simplicity). Net profit before tax: $1,900 − $100 = $1,800.
| Layer | Amount | % of sales |
|---|---|---|
| Sales | $12,000 | 100% |
| Gross profit | $4,800 | 40% |
| Operating profit | $1,900 | 15.8% |
| Net profit (before tax) | $1,800 | 15% |
Why your bank balance will not match this
Here is the same month in cash terms. This simple version assumes every purchase and expense was paid in cash during the month, that you owed suppliers nothing at either end, and that no older customer debts were collected.
| Cash in | Amount |
|---|---|
| Sales collected ($12,000 minus $1,500 still owed) | $10,500 |
| Cash out | Amount |
|---|---|
| Stock purchases | $7,500 |
| Operating expenses | $2,900 |
| Loan interest | $100 |
| Total | $10,500 |
Cash change for the month: $0. The shop made $1,800 of profit and the bank balance did not move. The gap has two causes:
- $1,500 of credit sales are profit on paper but not yet money.
- $300 more stock ($3,300 closing − $3,000 opening) is cash you spent on goods still on the shelf.
$1,500 + $300 = $1,800, which is exactly the missing profit.
This is the most useful thing the example shows: you can be profitable and still short of cash. It is also why tracking who owes you matters as much as tracking sales.
Money you take out for yourself ("owner's drawings") and loan repayments of the borrowed amount (not the interest) also reduce cash without being expenses. If you pay yourself from the drawer, write it down as a drawing, not as a sale reversal or an expense.
How to calculate your own profit in five steps
- Choose a period. A month is the usual unit; a week works for fast-moving shops.
- Add up sales for that period, including credit sales.
- Calculate COGS with opening stock + purchases − closing stock. This needs a stock count at the start and end of the period. If you record what each item cost, many tools do this per sale.
- Add up operating expenses for the same period. Use the date the cost belongs to, not the date you paid, when you can.
- Subtract in order: gross profit, operating profit, net profit.
If step 3 feels heavy, a shortcut for a first pass is to subtract the cost of each item from its price at the time of sale. That is the cost of the goods you sold, one sale at a time.
Common profit mistakes
- Treating stock purchases as an expense. Buying stock converts cash into stock; it becomes a cost only when the stock sells. Counting purchases as expenses makes a month with a big delivery look like a loss. (Tax rules in your country may treat purchases differently; this is about understanding your real profit.)
- Ignoring credit sales or bad debts. Money owed to you is not money you have.
- Leaving out small recurring costs. Payment fees, packaging, phone and transport add up, and they are the ones that never make it into the notebook.
- Not asking what the owner earns. A shop that "makes $1,800" while the owner works full time may be paying the owner less than a job would. Record what you take out as owner's drawings, then compare net profit with the wage you need.
- Using the selling price when cost has changed. If your supplier raised prices, profit per item has fallen even if your price has not.
- Mixing personal and business money. Pay yourself a set amount and keep the rest in the business account.
Profit leak checklist
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- Sales include credit sales
- COGS is calculated from stock, not from "what I paid suppliers this month"
- Every operating expense category has been checked (rent, wages, utilities, transport, fees, packaging)
- Losses are recorded: expiry, damage, theft, giveaways
- Discounts are subtracted from sales
- Money you take out recorded as owner's drawings, and net profit compared with the wage you need
- Cost prices updated when suppliers change prices
How to track profit automatically
If you record each sale with its cost, the app can calculate profit per sale, and the report adds it up. That is faster than rebuilding the month from a notebook. The sales tracking app guide shows how Daily Sales Record handles sales, profit, stock and customers.
In Daily Sales Record, products carry a cost and a selling price, so each sale produces a profit figure. The Business Report (Reports section) shows sales, profit, expenses, other income and the final net income for any date range, with charts for trends, top products and top customers. The app can only calculate profit if the product's cost has been entered; a product sold with no recorded purchase cost shows a wrong or negative profit.
You can also test the margin side with the free profit margin calculator, and practise the cash side with a simple cash book.
Frequently asked questions
What is the formula for business profit?
Profit = revenue − costs. In steps: gross profit = sales − cost of goods sold; operating profit = gross profit − operating expenses (rent, wages, utilities and similar); net profit = operating profit − interest and taxes.
What is the difference between gross profit and net profit?
Gross profit only subtracts the direct cost of the goods you sold. Net profit subtracts every other cost too: rent, wages, fees, interest and tax. Net profit is what the business actually earned.
Is cash in the bank the same as profit?
No. Stock you bought but have not sold, customers who have not paid yet, loan repayments and money you take out for yourself change your cash without changing your profit. A credit sale does the opposite: it adds to profit before the cash arrives.
How do I calculate cost of goods sold?
Cost of goods sold = opening stock + purchases during the period − closing stock. It counts only the cost of the goods that were actually sold.
Should I count my own pay as an expense?
In your books, money you take out is usually recorded as an owner's drawing, not an expense; the treatment depends on your country and business type. For your own decisions, subtract a fair wage for your time from net profit. If nothing is left, the business is not paying you.
Final takeaway
Profit comes in layers: gross, operating, net. Calculate each one for the same period, and keep it separate from your cash balance. A month where sales are high but cash is short is usually unpaid credit, new stock or owner's drawings, not missing profit.
Related reading: revenue vs profit for the difference in plain terms, and how to know if your business is actually making money for a quick monthly check.
This article is general information, not accounting or tax advice. Tax treatment varies by country and business type.