Article 3: How to Find Your Real Profit in a Small Shop
The short answer: your real profit is what is left after you take away the cost of the goods you sold, and then the other money you spent. The goods still on your shelves are not a cost yet. This is the part most shop owners forget.
Why sales minus payments is the wrong way
Many shop owners do this: sales, minus all the goods they bought, minus all other money spent. But some of the goods you bought are still on your shelves. You have not sold them, so they have not become a cost yet. If you take them away, your profit looks smaller than it really is.
What you need
- Your total sales for the month (cash sales + sales on credit) from your daily pages.
- The value of the goods on your shelves at the start of the month.
- The goods you bought during the month.
- The value of the goods on your shelves at the end of the month.
- Your other money spent for the month.
How to value your shelves
Count the goods, and multiply each by the price you paid, not the price you sell at. Add it all up. Do this on the same day each month, for example the last day, after closing. The end of one month is the start of the next.
An example
- Total sales (cash and credit): 100,000
- Goods on the shelves at the start: 30,000
- Goods bought during the month: 60,000
- Goods on the shelves at the end: 35,000
- Other money spent: rent 6,000 + wages 9,000 + electricity 1,500 + transport 1,200 + other 2,300 = 20,000
Step 1: Find the cost of the goods you sold
30,000 + 60,000 − 35,000 = 55,000
Step 2: Find the profit from your goods
100,000 − 55,000 = 45,000
Step 3: Take away your other money spent
45,000 − 20,000 = 25,000
Your real profit for the month is 25,000.
If you used the wrong way (100,000 − 60,000 − 20,000), you would get only 20,000. That is 5,000 too low, because 5,000 of goods are still on your shelves.
What about the money you took for yourself?
Money you took for yourself is not a cost of the shop. Do not take it away from your profit. But compare it with your profit. If you took 18,000, then 25,000 − 18,000 = 7,000 stayed in the business. If you take more than your profit every month, the shop slowly gets poorer.
Two things to remember
- Loan: the extra charge (interest) is part of your other money spent. Paying back the loan itself is not.
- Sales on credit count as sales, even if the customer has not paid yet. That is why your profit can be bigger than the cash in your cash box. We explain this in the next article.
Common mistakes
- Forgetting to count the goods on the shelves.
- Valuing goods at the selling price, not the price you paid.
- Taking away the money you took for yourself as if it were a shop cost.
- Counting the loan payment as an expense.
What comes next
In the next Article 4, we explain why a shop can show a profit and still have no cash.
This article is for general learning. It is not personal financial advice.
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