Guides · 7 min read
How to know if your business is really making profit
The short answer
Profit is what you sold, minus what those goods cost you, minus your running costs for the same period. Money in your hand is not profit: it includes money you must use to restock, and it leaves out what customers still owe you. Work it out once a month with the steps below.
Step 1Choose the period, such as last month
Profit only makes sense for a stretch of time. Start with last month, from the first day to the last. If your records are new, use last week. Write the dates at the top of a clean page.
Step 2Add up your sales for that period
Add every sale from your book, or from your bank and POS alerts plus the cash sales you wrote. Include sales on credit, because the goods have left your shop even if the money has not come in yet.
Step 3Work out what the goods you sold cost you
For each item, multiply how many you sold by what you paid for one. If you sold 40 phone cases that cost you ₦1,500 each, that is ₦60,000. If you sell many kinds of items, there is a quicker way: take your stock at the start of the month, add what you bought during the month, and take away the stock left at the end. What is gone is what you sold, at the price you paid.
Step 4List every running cost, including the hidden ones
Running costs are what you spend to stay open: rent, light or fuel, transport, data and airtime, staff pay, POS and bank charges, levies, packaging. If you pay rent once a year, divide it by 12 and count one month. Do the same for any big cost you pay once in a while.
Step 5Take the costs away from your sales
Sales, minus what the goods cost you, minus running costs. What is left is your profit for the period. If it is below zero, the business spent more than it earned, even if your account never looked empty.
Step 6Compare it with what you take for yourself
Add up what you took out of the business for your own life in the same period. If you took more than the profit, the business is shrinking, because you are spending money it needs to restock. If you took less, the difference is what the business can use to grow.
Step 7Do it again next month and compare
One month tells you where you are; two months tell you which way you are going. Look at which number changed: sales, the cost of goods, or a running cost. That is where to act.
An example: one month at a phone accessories shop
Tunde sold ₦380,000 of cases, chargers and earphones in September. Here is his month:
- Sales in September₦380,000
- What those goods cost him− ₦245,000
- Rent (₦300,000 a year, so one month)− ₦25,000
- Transport to the market− ₦18,000
- Data and airtime− ₦6,000
- POS and bank charges− ₦3,500
Profit for the month₦82,500
He took ₦70,000 out for himself in September, so ₦12,500 of the profit stayed in the business. His account had felt full all month, but most of that money was his supplier's: it was the cost of the goods he sold.
Or let Clara do it
Clara can do all of this for you
Instead of adding up sales, costs and spending yourself, ask Clara. She works out your profit from the records you saved, in seconds.
How much profit did I make in September?
ClaraIn September you sold ₦380,000. The goods cost you ₦245,000 and you spent ₦52,500 on running costs, so your profit was ₦82,500.
Free while Clara is in private beta. Works on any phone, even offline.
Mistakes to avoid
- Counting all the money in your account as profit. Most of it is the cost of the goods you sold, and you need it to restock.
- Forgetting yearly costs like rent, licences or a generator repair. Spread them over the months.
- Leaving out goods you took for home. They cost the business money like any other.
- Only looking at sales. A month with high sales can still lose money if costs rose faster.
Do this today
Take last week, add up your sales, take away what the goods cost you and your running costs, and write your profit for the week at the top of today's page.
Questions owners ask
What is the difference between profit and cash?
Cash is the money you have right now. Profit is what your sales earned after the cost of the goods and your running costs. You can have plenty of cash and no profit, or a good profit with little cash when customers owe you.
How often should a small business work out its profit?
Once a month is enough for most small businesses. If your records are new, do it every week for the first month so you get used to it.
Should I count my own salary as a cost?
Work out the profit first, then compare it with what you take for yourself. If you take more than the profit, the business is shrinking.
Or let Clara do it
Clara can do all of this for you
Instead of adding up sales, costs and spending yourself, ask Clara. She works out your profit from the records you saved, in seconds.
How much profit did I make in September?
ClaraIn September you sold ₦380,000. The goods cost you ₦245,000 and you spent ₦52,500 on running costs, so your profit was ₦82,500.
Free while Clara is in private beta. Works on any phone, even offline.
