Calculating your revenue and profit

Calculating your revenue and profit is a fundamental aspect of good business management. Fortunately, it’s a straightforward process once you get the hang of it.

To calculate your revenue, total up the amount of money coming into your business; this will usually be from sales of products or services. To calculate your profit, deduct your total business expenses, like rent and payroll, from the revenue amount. The amount remaining is your profit.

If you’re still intimidated, you’re not alone. Many business owners stress out when it comes to handling the finances, but it’s a lot easier than most people realize. Below, we’ll walk you through the process step-by-step.

The Difference Between Revenue and Profit

Although the terms “revenue” and “profit” are often used interchangeably in the business world, they’re two very different things. It’s essential to know the difference between them to calculate both accurately.

• Revenue: is all the money coming into your business
• Profit: is how much you have left once you subtract business expenses
• Expenses: are any funds spent in the running of the business

(Source: Investopedia)

The easiest way to picture the difference between revenue and profit is this formula: Revenue – Expenses = Profit

We’ll get into how to calculate all three of these factors below, starting with revenue.

How to Calculate Revenue

As previously mentioned, revenue is any money that comes into your business). Common sources of revenue are:

• Sales
• Services provided
• Rental income
• Interest earned
• Licensing fees
• Customer memberships

Most companies use accounting software to track their revenue, although some mom and pop shops still use paper bookkeeping methods. Whichever way you choose to do it, make sure to track all money coming into your business’s accounts.

Calculating the total revenue is as simple as adding up all incoming money in each month, quarter, or whatever period you’re looking at.

This is where many new business owners get confused, thinking of revenue as profit. Remember, though, that revenue doesn’t take expenses into account. Just because there’s a certain amount of income in the bank doesn’t mean you have that much to spend.

It’s the same principle as not spending an entire paycheck online shopping before paying your bills. Basically, the revenue is the paycheck, and the profit is what’s left of the paycheck after rent is paid.

How to Calculate Expenses

Business expenses are the opposite of revenue since they’re the total funds being spent by the business.

Examples of common business expenses are:

• Rent
• Payroll
• Supplies
• Taxes
• Travel expenses
• Marketing
• Insurance
• Utilities
• Vendor payouts

Any expenses accrued by the business will be effectively canceling out that amount of revenue when it comes to calculating profit. For this reason, it’s vital to keep track of all your expenses. This will be done using the same accounting software (or paper ledgers) that you use to track your revenue.

Calculating the total expenses is done by adding up all the expenses in a specific timeframe, usually by month, quarter, or year. 

How to Calculate Profit

Now that you know a little more about revenue and expenses, you’re ready to calculate your profit. Again, the formula for calculating your business’s profits is: 

Profit = Revenue – Expenses

So to calculate your profit, follow these three simple steps:

• Add up every source of income for your business (revenue)
• Add up every single penny going out of your business (expenses)
• Subtract the expenses from the revenue. The total is your profit.

In other words, the profit is the money you’re taking home at the end of the day or using as you see fit, reinvesting it in the business, and so forth.

How to Keep Track of Revenue, Expenses, and Profit

It’s easy enough to tell someone to add up their revenue or expenses, but for a business owner who hasn’t kept close track of the money going in and out of the business, this can be a nightmare.

The following tips will help you keep your business finances in order, so the next time you have to file an expense report, you’ll be ready.

Choose a System (and Stick to It)

It really doesn’t matter whether you choose to stick to a good old fashioned paper ledger for keeping track of business finances or prefer to use accounting software like QuickBooks, as long as you use the system that makes the most sense for you and your business.

• If you’re not tech-savvy and really don’t want to spend time learning how to use new accounting software, there’s absolutely nothing wrong with using a paper system.
• On the other hand, if you’re comfortable learning new programs and want the convenience that technology provides, using accounting software might be the way to go.

The main thing to keep in mind when tracking business profits and losses is to find a maintainable way to keep a record of every penny coming into and going out of your business.

The more detailed you can get with your tracking, the better you’ll be able to see where money might be getting wasted, as well as where your most substantial sources of revenue are coming from.

This is one place where accounting software is superior. These programs allow you to run various reports with just a few clicks of a mouse, taking less time and virtually eliminating the possibility of human error.

Keep Records of Everything

One of the cardinal rules in bookkeeping is: record everything right away.

Keep all your business-related receipts, and immediately enter any money gained or lost into whatever system you-re using. Whatever you do, don’t rely on memory or put off recording things until later, or you’ll be left with inaccurate figures and sloppy books.

Worse, if you’re ever audited, you won’t be able to prove expenses you’ve climbed if you don’t have the receipts for them.

It’s worth pointing out that all the records in the world won’t help anyone if they’re not organized, so make sure to keep everything in one place, organized by date.

Run Regular Reports

It’s tempting to hide your head in the sand if you’re afraid of what you might find when you delve into your business’s financial situation. But it’s important to know where your business always stands financially, which means running regular reports.

The closer eye you keep on your business accounts, the sooner you’ll be able to spot and fix any potential issues.

Get Help from a Pro

If you’re finding the idea of doing your business’ finances overwhelming, consider hiring a professional bookkeeper or accountant. A bookkeeper will usually be hired to help you with the day-to-day organization and tracking of finances. An accountant is trained to use the information recorded by the bookkeeper to generate reports like:

• Expense reports
• Profit and loss summaries
• Cash flow statements
• Balance sheets

(Source: Business News Daily)

Accountants will often be hired for specific tasks, like generating quarterly reports or summarizing your finances for tax time. However, many administrative professionals are both bookkeepers and accountants, so they can be hired to do both jobs.

It’s also possible to hire someone:

• On a project-basis
• To set up your bookkeeping system and teach you how to use it
• Or to review the system that you currently have in place and see if they can help you improve it

Final Thoughts

Is knowing how to correctly calculate your revenue, expenses, and profit super crucial for business owners? Absolutely. But as you can see, it’s just a matter of keeping accurate, organized records. Once you get that down, it’s just basic addition and subtraction—nothing to get stressed about.