How to Calculate Total Profit for Your Business

Understanding your business’s total profit provides a clear picture of its financial performance. This measurement indicates how effectively operations generate earnings beyond expenses. Knowing this figure is fundamental for assessing financial health, guiding strategic decisions, and attracting potential investors or lenders.

Understanding the Core Components of Profit

Before calculating profit, understand the fundamental financial terms involved.

Revenue

Revenue is the total money a business earns from its primary activities, such as selling goods or providing services, before any expenses are deducted. For example, a retail business earns sales from merchandise, while a consulting firm recognizes service revenue from client engagements. This figure is recorded on a business’s income statement.

Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) includes the direct costs attributable to producing the goods a company sells. This encompasses raw materials, direct labor, and manufacturing overhead directly tied to production, such as factory utility costs or depreciation on manufacturing equipment. For service businesses, a similar concept is “Cost of Services,” representing the direct expenses incurred to provide a service.

Operating Expenses

Operating expenses are the costs a business incurs in its day-to-day operations not directly tied to producing goods or services. These overhead costs include administrative salaries, office rent, utility bills, marketing, and depreciation on office equipment. These expenses are necessary to keep the business running and support its revenue-generating activities.

Non-Operating Income and Expenses

Non-operating income and expenses arise from activities outside a company’s core business operations. Non-operating income includes interest earned on bank deposits or investments, or a gain from selling old equipment. Non-operating expenses involve interest paid on loans, or a loss from selling a non-essential asset. These items are reported separately because they do not reflect the profitability of the company’s main business activities.

Taxes

Taxes are mandatory payments to government entities, calculated as a percentage of a company’s taxable income. For businesses in the United States, this primarily involves federal income tax. Many businesses also face state income taxes, which vary by jurisdiction. These tax obligations reduce the earnings available to business owners or for reinvestment.

Calculating Gross Profit

Gross profit is the initial measure of profitability, showing how much revenue is left after accounting for the direct costs of producing goods or services. This figure is calculated by subtracting the Cost of Goods Sold (COGS) from total revenue. It indicates the efficiency with which a business uses its direct resources to produce its offerings. A higher gross profit suggests better control over production costs or stronger pricing power for products and services.

For example, a small manufacturing business generates $500,000 in revenue from selling its products over a year. During that same period, the direct costs associated with producing those sold products, including raw materials and direct labor, amounted to $200,000.

To calculate the gross profit, you would subtract the $200,000 COGS from the $500,000 in revenue. This calculation yields a gross profit of $300,000, representing the earnings available before considering operating expenses.

Calculating Operating Profit

Operating profit, also known as earnings before interest and taxes (EBIT), provides insight into a company’s profitability from its core business operations. This measure is derived by subtracting all operating expenses from the gross profit. It reflects how well a business manages its everyday costs, such as administrative salaries, rent, and marketing, in relation to its direct earnings from sales. This figure excludes any non-operating income or expenses and taxes.

Continuing with the example, the manufacturing business had a gross profit of $300,000. Over the same period, its operating expenses, including administrative salaries, office rent, and utility costs for the general office, totaled $100,000.

To determine the operating profit, you subtract these $100,000 in operating expenses from the $300,000 gross profit. This calculation results in an operating profit of $200,000, which represents the earnings generated solely from the company’s primary business activities.

Calculating Net Profit

Net profit, often referred to as the “bottom line,” is the final measure of a company’s profitability after all expenses, including non-operating items and taxes, have been deducted. This figure represents the total earnings available to the business owners or for reinvestment back into the company. It is calculated by taking the operating profit, adding any non-operating income, subtracting any non-operating expenses, and finally subtracting income taxes. This final amount provides the most comprehensive view of a business’s financial success.

Building on the previous calculations, the manufacturing business achieved an operating profit of $200,000. In addition, the company earned $5,000 in interest income from a savings account, which is a non-operating income. It also incurred $2,000 in interest expense on a business loan, considered a non-operating expense.

Finally, the business owed $40,600 in federal and state income taxes, calculated based on its taxable income. To calculate net profit, you would add the $5,000 interest income to the $200,000 operating profit, then subtract the $2,000 interest expense and the $40,600 in taxes, resulting in a net profit of $162,400.