Hey Founders! Welcome again. Yes, I am so excited about today’s topic. You know a lot of times you refer to some things as being difficult because you don’t know how to do them. The same way some people think it is very difficult to ascertain their profit amount.
First, we have to ascertain that if you are not an NGO, while fulfilling the purpose of your business like solving a problem (we discussed this earlier), the next thing is to make dough, yeah money. Show me an entrepreneur that isn’t making money and I will show a business on the brink of … (never mind, not as harsh as it sounds).
Why Profit-Making is Important in a Business
1. It is a major metric to show that your business is performing well — to show if the society is feeling/really needs the existence of your business.
2. It’s the only way to sustainability — we once talked about how you can get grants and loans but there is a limit to this. Plowing back your profit as capital is one of the cheapest business funding options
3. It serves as a motivation for an entrepreneur. Yes, every farmer is happy when their plants starts yielding fruit. Reward of an entrepreneur labour is profit.
4. Expansion options — You can thrive and expand on profit made and retained on the business.
How to Calculate Profit
Now, how do you calculate your profit? Let’s bring our knowledge on expenses here.
Your profit is your Income minus your expenses.
Earned Income is the amount you received during the course of your business as a compensation for rendering the goods and services you provide.
There are two types of income: earned and unearned. Unearned income are those miracles you come across, for example, if you operate an account that gives you interest on your Bank balances at the end of the month. The interest you receive is an unearned income.
- Your expenses too, are categorized into two: the expense that relates to your core business operations if you produce shoes (for example, your core business expense in the light of this discussion is the cost of raw materials you use in production);
- expense not directly incurred in your production process (for example, the cleaning service expense of your office space).
Your profit will then be:
Your Total Income minus Your Total expenses.
This brings us back to why you should keep good records of transactions that occur in the course of your business. You can only be able to gather and accurately account for this if you keep good records.
Now try this and let me know your answers in the comment section,. You can reply with just ‘positive’ or ‘negative’. Also share your thoughts and suggestions with us.
Till we bring you another exciting topic, stay determined. Keep building!