The Gross Income of your business is going to be the total you made from selling your products. This is the most basic number for your business as it represents how much money you have taken in from your customers.
For our purposes,we are going to have just two products, Product A which we charge $25 for and Product B, which we charge $15 for.
For our purposes,we are going to have just two products, Product A which we charge $25 for and Product B, which we charge $15 for.
Now, for the month, let say we sold 63 units of Product A and 41 units of Product B, the math is simple:
($25 x 63)+($15 x 41) = Gross
So our Gross for the month is $2190
Now if that was it, that would be great, but the Gross is not what you have, there are two more numbers you should calculate, the Profit Margin (sometimes called the Gross Margin) and the Net Profit.
Next we are going to move on to the Profit Margin. Why is this number important? Knowing your Profit Margin helps you find where you can change things. I generalized the Cost of products, but when you calculate this you should have each part of that listed. If your Margin is low, then you need to know what is making it low. To do this ask yourself a couple questions:
- Why is the Margin low?
- Is it the cost of the product itself?
- Is it your shipping?
- Is it something else?
- Do you have options other than raising your prices, can you lower your cost somewhere?
Some businesses calculate the Margin before they make the product available for sale. To do this, they use what they want the Price to be for their customers. This allows them to see if they need to change the price before they start selling. Increasing it later could lead to a problem with your customers, remember how you felt last time you went to get gas and the price had gone up $.05 overnight.
To figure out your Profit Margin, you will need to calculate your non-fixed cost for your products, that means the cost of making your product, employee's time for putting the product together, shipping etc. Let say the cost that we incur for Product A is $4.75 and for Product B it is $2:
($4.75 x 63)+($2 x 41) = Cost
Our Cost is $381.25
To get your Profit Margin you will first need to subtract the Cost from the Gross:
$2190 - $381.25 = $1808.75
Next, you will want to divide that total by the Gross, and then multiply the results by 100 to get the Profit Margin:
($1808.75 ÷ $2190) x 100 = Profit Margin
Our Profit Margin is 82%, that is a good Profit Margin, and likely a bit higher than most businesses are going to have.
Finally let's calculate our Net Profit. The Net Profit is going to be the total actual income your business made, beyond just the cost of your products, but all cost you business incurs, this means the static cost of your Bills, including rent. So if beyond the Cost of our products we also have Bills that equal $550 per month. Your Net is going to be your Gross – (Cost + Bills):
$2190 – ($381.25 + $550) = Net Profit
Our Net Profit for the month is $1258.75. Not too bad if you are just doing this as a side business on your own.
Now, bear in mind that this is just the basics, you will need to also calculate your taxes. It would also not be amiss to hire an accountant to assist you, true it would eat into your Net Profit, but they will often be able to also help you with your quarterly tax returns. You can also choose to do this yourself with Business Account software like QuickBooks or Peachtree.
You can also get a good deal of help, if your business is in the United States, through the Small Business Administration and their website.
Good Luck and Good Sales.
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