How do small businesses calculate net profits?

Do you know if your business is truly profitable?

In previous articles, I have spoken about various aspects of Small Business Financial Management 101.

We can now use this information — our business data — to find out if our business is making a profit or a loss.

So, how do you calculate this?

Your operating expenses (OPEX) are the expenses that are needed to keep the business running. It includes:

To refresh your memory:

Direct costs: money that you spend to produce a product or service. Some examples are:

Indirect costs: money that you spend but that is not directly related to manufacturing a product or creating a service. Here are some examples that many businesses will recognise:

Take your gross profit and subtract the total of your operating expenses. If you pay taxes, make sure to also subtract the amount you will have to pay in tax. The result is your net profit or loss. It will tell you how your business is doing financially. Note: your net profit is also called net income.

Here is an example of a first quarter (= 3 months) profit and loss statement for a consulting company. I designed this for use by small businesses in developing countries. (Click on the picture to enlarge it.)

As you can see, this consulting firm is doing well, but they incurred a loss when they purchased computers. My recommendation to them will be to start saving money to create financial reserves for these kinds or purchases. If they do so, they will be able to use their reserves to do payment without incurring a loss.

I’m curious to know if you followed the steps outlined in this series about Financial Business Management 101? What is the result for your business?

Greetings from Tonia Dabwe | Guide My Growth

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