You've been working hard to develop your business, whether it's shoveling walks for your neighborhood, building websites, or tutoring kids for the SAT.
It's time to figure out how much you made so you count the cash in the box under your bed. Easy, right?
Types Of Profits
There are three types:
Luckily, you can easily calculate them. You'll need accurate numbers to report your profits on your taxes, loan applications, or and other business needs.
Gross profits are the total sales/income minus the cost of goods. Goods are the items that are resold or the materials used to make the items that you sell.
Aran bakes and decorates custom cakes.
In 2020 Aran sold $20,000 worth of cakes. (Total sales)
Aran also bought $4,000 worth of cake-baking supplies.(Cost of goods)
Total Sales - Cost of Goods = Gross Profits
$20,000 - $4,000 = $16,000
Aran's gross profits are $16,000.
Operating profits are the profits remaining after the "costs of doing business."
Costs of doing business include:
Operating profits are calculated as gross profits minus the cost of doing business.
In 2020 Aran's gross profits were $16,000.
Aran also spent:
$200 on gas/mileage for deliveries
$350 on employees for a big job
$50 for advertising
$5,400 for rent and utilities
In 2020 Aran's cost of business was $6,000.
Gross Profits - Cost of Business = Operating Profits
$16,000 - $6,000 = $10,000
Aran's operating profits are $10,000.
Net profits are what remains after taking all other expenses into consideration. That is to say: what you actually earned.
In 2020 Aran's operating profits were $10,000.
Aran's taxes were $2,500. There were no loans with interest.
Operating Profits - Taxes & Interest = Net Profits
$10,000 - $2,500 = $7,500
Aran's net profits are $7,500.
Try It Yourself!
Determine the three types of profits for Rowan's Bait Shop: he could really use your help!
Gross Profits = Total Income - Material Costs
Operating Profits = Gross Profits - Cost of Business
Net Profits = Operating Profits - Taxes & Interest
In 2020, Rowan's Bait Shop took in $90,000 total income on merchandise sales.
$5,000 for material merchandise that was sold in the shop
$35,000 for other business costs (utilities, employees, advertising, etc.)
$10,000 for taxes (there was no interest this year)
What are the Gross (G), Operating (O), and Net (N) profits of Rowan's Bait Shop?
Organize your income and expenses to figure out your three different profits! Remember:
Your feedback matters to us.
This Byte helped me better understand the topic.