Money9 min readUpdated By the StockỌja team
How to calculate profit in a small business
Short answer
Profit is what is left from your sales after you take out what the goods you sold cost you and what it cost to run the business. For a month: add up your net sales, subtract the cost of the goods you sold to get gross profit, then subtract your running expenses (rent, salaries, transport, data, fuel) to get net profit. Money in the till is not profit; part of it already belongs to your supplier.
Why sales are not profit
A busy shop can sell ₦2 million in a month and still not make money. Most of what comes in pays back what you spent on the goods, and some of the rest goes on rent, staff, transport and light. The question is not "how much did I sell?" but "how much is left after the goods and the running costs are paid for?"
Many shop owners only find out the answer when restocking time comes and the money is not enough. Working out profit every month tells you sooner, while you can still change prices, cut costs or stop stocking the items that lose you money.
The three numbers you need
| Number | What it means | Where it comes from |
|---|---|---|
| Net sales | What customers actually paid you | Your sales record, minus returns and discounts |
| Cost of goods sold | What the goods you sold cost you | Cost price of each item sold, or your stock counts |
| Expenses | What it cost to run the business | Rent, salaries, transport, data, fuel, repairs, fees |
Gross profit = net sales − cost of goods sold. Net profit = gross profit − expenses.
Step 1: work out your net sales
Add up every sale in the period: cash, transfer, card and online orders. Then take out refunds and returns, and make sure discounts are already deducted. That is your net sales.
Leave out money that is not a sale: a loan, money you put into the business yourself, or a deposit for goods a customer has not received yet. If your sales are written in a notebook, this step is where most of the error creeps in. Sales that were never written down make every number after this one wrong.
Step 2: work out the cost of goods sold
There are two ways to do this. Use the one that fits how you keep records:
- 1
Item by item
If you know the cost price of every product, multiply the quantity sold by its cost price and add them up. 20 phone cases sold at a cost of ₦5,000 each is ₦100,000 of cost of goods sold. This is the most accurate method, and software does it for you on every sale.
- 2
From your stock counts
If you only know what you bought, use: opening stock + purchases − closing stock. Value both stock counts at cost price. You need a proper count at the start and end of the period, which is why stock taking matters for profit.
Damaged, expired and missing stock are costs too. If you threw away ₦30,000 of expired goods this month, that money is gone even though nobody paid for the goods.
Step 3: gross profit and gross margin
Take the cost of goods sold away from net sales. That is your gross profit: what the selling itself earned before running costs. Divide it by net sales to get your gross margin, the share of each ₦100 of sales you keep after paying for the goods.
Markup and margin get mixed up a lot, and it changes how you price:
| Buy at | Sell at | Profit | Markup (profit ÷ cost) | Margin (profit ÷ price) |
|---|---|---|---|---|
| ₦5,000 | ₦7,500 | ₦2,500 | 50% | 33% |
| ₦10,000 | ₦12,000 | ₦2,000 | 20% | 17% |
| ₦2,100 | ₦4,500 | ₦2,400 | 114% | 53% |
Step 4: take away your expenses
List every running cost for the period: rent, salaries, transport and delivery, data and airtime, generator fuel and electricity, repairs, bank charges and platform fees, packaging, marketing. Our guide on tracking business expenses has a simple daily routine. Gross profit minus these expenses is your net profit.
A worked example: one month in a boutique
| Amount | How | |
|---|---|---|
| Opening stock (at cost) | ₦900,000 | Counted on 1 September |
| Stock bought in September | ₦1,100,000 | Supplier invoices |
| Closing stock (at cost) | ₦750,000 | Counted on 30 September |
| Cost of goods sold | ₦1,250,000 | 900,000 + 1,100,000 − 750,000 |
| Net sales | ₦1,900,000 | All sales, minus ₦40,000 of refunds |
| Gross profit | ₦650,000 | 1,900,000 − 1,250,000 (a 34% margin) |
| Expenses | ₦410,000 | Rent ₦150,000, two salaries ₦160,000, transport ₦45,000, fuel ₦30,000, data ₦10,000, other ₦15,000 |
| Net profit | ₦240,000 | 650,000 − 410,000 |
Example figures. If the owner took ₦300,000 out of the business for personal use that month, the business spent more than it made, even though ₦1.9 million came through the till.
Mistakes that make profit look bigger (or smaller) than it is
- Counting stock purchases as expenses. It makes a month where you restocked look like a loss and the next month look great. Stock becomes a cost when it is sold.
- Forgetting the small costs. Transport, data, fuel and "small small" cash payments add up. Record them as you pay.
- Mixing personal and business money. School fees from the till are not a business expense, and they are not profit either. They are money the owner took out. Track them separately.
- Ignoring damaged, expired and missing stock. It is a real cost even though no money changed hands that day.
- Not counting closing stock. Guessing it means guessing your cost of goods sold, and so your profit.
- Free items for friends and family. They are sales at ₦0. Record them, or the stock simply disappears.
Profit per product: what actually makes you money
Once you know the cost and selling price of each product, compare them by total profit, not by how fast they sell. A fast seller with a thin margin can earn less than a slow item with a good one:
| Product | Sold this month | Profit per item | Total profit |
|---|---|---|---|
| Phone charger | 120 | ₦300 | ₦36,000 |
| Bluetooth speaker | 9 | ₦6,500 | ₦58,500 |
| Screen protector | 200 | ₦250 | ₦50,000 |
Example figures. Fast sellers bring customers in; high-margin items often pay the rent. Knowing which is which helps you decide what to push, what to reprice and what to stop stocking.
How StockỌja helps with the numbers
In StockỌja, each product has a cost price as well as a selling price, and the product form shows your margin as you type. Every sale through the point of sale or the online store reduces stock and records what was sold, so the dashboard can show your gross profit for the last 7 days.
On paid plans, the Sales & profit report brings it together for any period: net sales, cost of goods, gross profit, the expenses you recorded and an estimated net profit (gross profit minus expenses), plus which products earned the most profit and the value of the stock you are holding. See pricing for what each plan includes.
Further reading
Nigeria's small business agency, SMEDAN, has a short explainer on how to calculate your profit as a small business owner, with a manufacturing example.
Questions
What is the difference between gross profit and net profit?
Gross profit is your sales minus what the goods you sold cost you. Net profit is what is left after you also pay the running costs of the business, such as rent, salaries, transport, data and fuel. A shop can have a healthy gross profit and still make a loss.
Is buying stock an expense?
Not when you buy it. Stock you buy is money turned into goods on your shelf. It becomes a cost when you sell it (as the cost of goods sold), or when it is damaged, expires or goes missing.
What is the difference between markup and margin?
Both compare your profit on an item with a price, but a different price. Markup divides the profit by what you paid; margin divides it by what you sold it for. Buy at ₦5,000 and sell at ₦7,500: the profit is ₦2,500, a 50% markup but a 33% margin.
How can I calculate profit if I have no records?
Start now. Count your stock today and value it at what you paid, then record every sale, every stock purchase and every expense for a month. At the end, count again. With an opening and a closing count you can work out a real profit for that month.
How often should a small business calculate profit?
Glance at gross profit every week to catch pricing problems early, and work out net profit every month, after you have counted or checked your stock.
Where StockỌja fits
- GuideHow to track business expenses Simple routines for recording running costs, separating business and personal money, and seeing real profit.
- GuideHow to do stock taking in a shop Prepare, count in pairs, handle cartons and sizes, find what went missing and correct your records. Free sheet included.
- ProductSales tracking Every sale from the counter and the online store, by day, branch, payment method and product, with gross profit.
- ProductExpense tracking Rent, salaries, transport and other running costs by category and branch, next to your sales.
- ProductProduct catalogue Products, variants, categories, brands, photos, SKUs and barcodes, imported from CSV and shared by every branch.
- ProductPricing Start free with one store. Paid plans add branches, staff, products and reports.