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Many small businesses frequently misunderstand this concept: believing that sales reflect real profits. However, financial experts point out that the true financial result is only obtained after subtracting all costs associated with operating the business.
Real profit is the amount available to the owner after deducting production, operating, and daily maintenance expenses.
Revenue doesn’t always mean profit
The first step for accurate calculation is to identify total revenue, that is, all the money earned from sales in each period. However, this amount alone does not represent profit.
From this revenue, you must subtract the direct cost of the product or service, which includes the purchase of merchandise, supplies, or raw materials necessary for sale.
Only after this subtraction is the so-called gross profit obtained.
Operating expenses: The most forgotten factor
The next step is to reduce operating expenses, one of the most common mistakes in small businesses. These include rent, utilities such as water, electricity, and internet, transportation, salaries, packaging, advertising, and other costs associated with running the business.
These expenses, although they may seem minor, can significantly reduce net profits if not properly recorded.
The business’s net profit
By subtracting product costs and operating expenses from total revenue, you obtain net profit, that is, the cash available that can be reinvested, saved, or withdrawn by the owner.
Experts recommend that entrepreneurs consider this result as the true indicator of their business’s financial health, more so than sales volume.
Common mistakes in small businesses
Among the most common mistakes when calculating profits are confusing sales with earnings, failing to record small expenses known as “micro-expenses,” mixing personal and business finances, and not assigning oneself a salary as the owner.
These practices can lead to an inaccurate perception of financial performance and negatively impact decision-making.
Key recommendation:
Experts recommend keeping constant track of income and expenses, either in a notebook or using basic digital tools, to gain a clear view of the business’s true performance. This way, entrepreneurs can make more informed decisions, improve their financial planning, and ensure the sustainability of their operations.
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