As we all know, profit is a financial gain from a transaction or from a period of investment or business activity, usually calculated as income in excess of costs or as the final value of an asset in excess of its initial value.
It is the total revenue minus total expenses, profit is the amount of money a business “makes” during a given accounting period. The more profit you make, the better, as profit can be re-invested into the business or retained by the business owners. Being able to accurately determine your business’s profit is an essential part of being able to judge its financial health. It can also help you decide how to price your goods and services, how to pay your employees, and more.
To make your business gain more profit, begin by adding up all of the money your business has made in a set period of time, (either, quarterly, yearly, monthly,etc.) other sources, like products sold, services rendered, membership payments, or, in the case of government agencies, taxes, fees, the sales of resource rights, and so on.
Note that you will need to subtract any amount of cash refunded to customers for returns or disputes in order to find an accurate figure for your total income.
It’s easier to understand the process of calculating a business’s profit by following along with an example.
Let’s say that we own a small publishing business. In the last month, we sold P20,000 worth of books to retailers in the area. However, we also sold the rights to one of our intellectual properties for P7,000 and received P3,000 from book retailers for official promotional materials. If these represent all of our revenue sources, we can say that our total income is P20,000 + P7,000 + P3,000 = P30,000.
This module is divided into two lessons:
- Lesson 1 – Compute for profits
- Lesson 2 – Create the company’s five (5) year projected financial statements
To be able to successfully complete this module, previous knowledge in adding and multiplying numbers will best help.
After carefully studying the contents of this module, you should be able to:
- Identify essential components in computing revenues and costs;
- Differentiate between gross profit, operating profit and net profit;
- Interpret financial ratios such as the gross profit rate, operating profit margin and net profit margin;
- Compute actual revenues;
- Compute actual costs;
- Compute gross profit, operating profit and net profit;
- Compute the gross profit rate, operating profit margin and net profit margin;
- Create profit schedules and reports;
- Appreciate the importance of keeping track with the performance of one’s business through the correct and honest computation and reporting of business profit; and
- Appreciate the importance of the correct computation and interpretation of financial ratios gross profit rate, operating profit margin and net profit margin.