How to know your real profit every month
Updated
Record every sale, purchase and expense as it happens, value your closing stock, count expenses in the month they belong to, and reconcile your bank. Then your profit and loss account for the month is ready in the first week, and it is a figure you can act on.
Why most owners do not know
In many businesses the accounts are written up after the year ends, for the tax return. By then the figure is history. You cannot change a price, drop a loss-making product or cut an expense in a year that is over. A monthly profit figure, even an approximate one, is worth more than an exact one that arrives nine months late.
What real profit needs
1. Every sale and purchase, in the month it happened. Sales are counted when you bill, not when you are paid. Purchases are counted when the goods and the bill arrive, not when you pay.
2. The cost of what you sold, not what you bought. Value your stock at the end of the month. Opening stock plus purchases minus closing stock is the cost of goods sold. Use the margin calculator to check an item’s margin.
3. Every expense, including the ones not yet billed. Rent, salaries and electricity for the month belong to the month, even if they are paid on the 7th of the next one. Your accountant records these as provisions.
4. Yearly costs spread across the year. Insurance paid once, or a bonus paid at Diwali, should not land in one month. Spread them.
5. Depreciation. Machines, vehicles and computers lose value every month. Leaving this out overstates profit in a business with heavy equipment.
6. A reconciled bank. Bank reconciliation catches the charges, interest and payments your books missed.
Read three numbers every month
- Gross margin %: gross profit as a share of sales. If it falls, look at discounts, purchase prices and the mix of what you sold.
- Expenses as a share of sales: if this rises faster than sales, growth is costing you more than it brings.
- Net profit against cash. If profit is steady and cash is falling, the money is in receivables or stock. See how to recover outstanding payments.
Keep personal and business money apart
One bank account for the business, and nothing personal through it. Every mixed entry is a question your accountant has to ask you later, and a reason the monthly figure is late.
How EaseDesk helps
In EaseDesk every invoice, purchase bill, receipt and payment is posted to your books when you save it, and stock is valued on FIFO or weighted average as it moves. The profit and loss account, balance sheet and cash flow are there for any period, with last year alongside, and can be emailed to you or your CA on a schedule. Your accountant adds the month-end provisions as journal vouchers. See accounting and finance.
Questions
Why is there money in sales but none in the bank?
Because profit and cash are different things. Profit counts a sale when you make it; cash arrives when the customer pays. Money also goes into stock, into loan repayments and into your own drawings, none of which are expenses. A business can be profitable and short of cash at the same time.
What is the difference between gross profit and net profit?
Gross profit is sales minus the cost of the goods you sold. Net profit is what remains after rent, salaries, interest, depreciation and every other expense. Gross profit tells you about pricing and buying; net profit tells you whether the business as a whole earns.
Why does closing stock matter for profit?
Because you have paid for goods you have not sold yet. Without counting closing stock, a month of heavy buying looks like a loss and the next month looks like a windfall. The cost of goods sold is opening stock plus purchases minus closing stock.
Should the owner's withdrawals be counted as an expense?
No. In a proprietorship or partnership, money you take for yourself is drawings, which reduce your capital, not your profit. Counting them as expenses hides how much the business really earns.
How soon after month end should I have the figures?
Within the first week. If every entry is made as it happens and the bank is reconciled, the month's profit and loss needs only a few adjustments, which your accountant or CA can pass in a day.