What’s the profit equation?
Much like a fingerprint, no two businesses are exactly the same. (Okay, fingerprints can be similar in extreme cases, but let’s pretend they can’t.) No two businesses will have the exact same expenses either. (Okay, some might have very similar expenses.) The good news is that the profit equation is fairly cut and dry, and only requires that you punch in some variables. The profit equation is as follows:
Profit = Gross Margin – Expenses
To further break this down, let’s look at each part of the equation. Don’t worry, there won’t be any long-form math problems, like way back in math class.
- Gross margin: Once you’ve taken out the cost of any supplies or materials, as well as any other variable costs or cost of goods sold, you’re left with your gross margin. Make sure not to mix up your gross margins with revenue, which is essentially the total amount you brought in based on the item’s selling price.
- Expenses: Any recurring fixed costs are expenses. Expenses typically include rent, salaries, phone bills, and so on.
With these definitions in mind, punch each item into the equation and solve to find your profit.
For example, let’s say your boot store has a yearly revenue of $100,000. Once you take out the cost of the leather and a new set of tools you had to buy, you’re left with $82,000. (This is your gross.) Next, you take out your expenses: the salary of your part-time cashier, the rent, taxes, and utilities. This comes out to $35,000. Now take the $82,000 and subtract the $35,000. This leaves you with a profit of $47,000. Not too shabby! (I guess this was kind of a long-form math problem. Sorry about that.)