Calculating Your Monthly Profit
Let’s be honest, most entrepreneurs don’t start a business dreaming about spreadsheets and financial reports. We start with a passion, a purpose, a vision of what we can create and share with the world. But as you have probably learned by now, that vision can only go so far without a solid financial foundation.
As a business owner, your Profit & Loss (P&L) statement is one of your most powerful tools for financial clarity. Also known as an income statement, a P&L summarizes your income and expenses over a set period, typically monthly, quarterly, or annually. It provides a clear snapshot of your business’s profitability and can answer important questions like:
How much money is coming in?
Where are my expenses going?
And ultimately, how much profit is my business actually making?
Understanding how to read and analyze your P&L is like having a roadmap for financial success. Let's walk through how to calculate your monthly profit using your P&L with specific examples.
4 Steps to Calculate Your Monthly Profit
Step 1: Start with Revenue (a.k.a. Your Total Income)
Your P&L statement begins with revenue, or the total amount your business has earned over the month. Revenue includes sales, services, and any other sources of income. Think of it as the starting point for all calculations, a snapshot of your business's top-line income before any costs are taken out. For easy tracking, make sure you categorize your income sources clearly.
Example: You run a photography studio. Over the month of October, you earned income from several different services:
Wedding Packages: $3,000
Portrait Sessions: $1,200
Print Sales: $300
Total Revenue = $3,000 + $1,200 + $300 = $4,500
Step 2: Subtract Cost of Goods Sold (COGS)
The next step is to account for any costs directly tied to creating your products or delivering your services. Known as COGS, these expenses include anything from materials and supplies to labor costs directly involved in providing your offerings.
Revenue minus COGS gives you Gross Profit. Once you subtract COGS from your total revenue, you will see your Gross Profit—a measure of how profitable your core products or services are before other expenses kick in.
Example: As a photographer, COGS could include:
Printing Costs: $200
Props and Backdrops: $150
Editing Software Subscription: $50
Total COGS = $200 + $150 + $50 = $400
Now, subtract COGS from your total revenue to find your Gross Profit:
Gross Profit = Total Revenue - COGS = $4,500 - $400 = $4,100
Step 3: Deduct Operating Expenses
Operating expenses cover the everyday costs of running your business that aren’t directly tied to a specific product or service. These can include rent, utilities, salaries, office supplies, marketing, and administrative expenses. Subtracting these expenses from your Gross Profit gives you Operating Profit.
Your Operating Profit helps answer the question: “How much is my business making after all regular, essential costs?”
Example: For October, your operating expenses might include:
Rent for Studio Space: $1,000
Utilities: $200
Marketing and Advertising: $150
Miscellaneous Supplies: $100
Total Operating Expenses = $1,000 + $200 + $150 + $100 = $1,450
Subtracting your operating expenses from your Gross Profit gives you Operating Profit:
Operating Profit = Gross Profit - Operating Expenses = $4,100 - $1,450 = $2,650
Step 4: Subtract Other Expenses or Add Other Income
Finally, you will factor in any non-operational income or expenses. This can include investment income, interest payments on loans, or taxes. After these adjustments, you will arrive at your Net Profit, often called the “bottom line.” This number shows your true profit after every cost and extra source of income has been considered.
Net Profit (a.k.a. the Bottom Line): This is the number that shows you exactly what’s left after every single expense is deducted. Net Profit is where your business truly stands—it’s the ultimate measure of profitability.
Example: You paid: $100 in interest on a loan and received a $50 rebate from a supplier.
Loan Interest: $100
Supplier Rebate: $50
Total Other Expenses = $100 (interest) - $50 (rebate) = $50 (net expense)
Now, subtract this from your Operating Profit to find your Net Profit:
Net Profit = Operating Profit - Other Expenses = $2,650 - $50 = $2,600
Putting It All Together
The simplified formula looks like this:
Net Profit = Revenue - COGS - Operating Expenses - Other Expenses (plus any other income)
Each month, reviewing your P&L statement with this formula gives you a clear view of what’s actually going on financially. Once you have your Net Profit, you can make strategic decisions, like setting aside for taxes, savings, or reinvestment into the business.
Why Understanding Your Monthly Profit Matters
Regularly tracking your profit not only shows you where your business is thriving but also helps you spot potential problem areas.
Are operating costs creeping up?
Is COGS eating into your Gross Profit?
By getting cozy with your P&L statement, you empower yourself with the knowledge to adapt and thrive.
Conclusion
A P&L statement may look complex, but it’s essentially a roadmap to your business’s financial success. By following these steps monthly, you will gain clarity and control, turning that bottom line into a strategic tool for growth.
Ready to take charge of your business finances? Start reviewing your P&L today and follow the steps above, or let me handle it for you! With my bookkeeping services, you can focus on what you do best while I ensure your financial clarity and growth. ✨
