Profit sounds simple: what you sell for, minus what it cost. In practice it helps to separate the cost of the product from the costs of running the business around it.
It also tells you how many units you have to sell before you stop losing money, which is the number most people forget to work out.
How to use the Profit Calculator#
- Enter price and cost. Use the same currency for both.
- Enter units and fixed expenses. Fixed expenses are costs that stay the same whatever you sell.
- Add tax if you want it. Optional. It gives a profit figure after tax.
The formulas#
Selling 500 units at 40 that cost 22 each gives revenue of 20,000 and gross profit of 9,000. After 3,000 in fixed expenses, net profit is 6,000, a 30 percent net margin. The break-even point is 3,000 ÷ 18 = 167 units.
What counts as a fixed cost#
Rent, salaries, insurance, software subscriptions and loan repayments usually stay the same whether you sell ten units or a thousand. Costs that grow with sales, like materials, packaging and card fees, belong in the cost per unit. Putting each in the right place gives a more honest break-even figure.
A worked example#
A baker sells a cake box at ₦3,500 that costs ₦2,100 to make, sells 420 boxes a month and pays ₦250,000 in fixed costs for rent, a worker and power. Revenue is ₦1,470,000, cost of goods is ₦882,000 and gross profit is ₦588,000. After fixed costs, profit before tax is ₦338,000, which is a 23.0 percent net margin. At a 30 percent tax rate, profit after tax is ₦236,600. Each box makes ₦1,400, so the break-even point is 250,000 ÷ 1,400 = 179 boxes a month.
Fixed and variable costs#
Variable costs rise with each unit sold: ingredients, packaging, delivery fees and sales commissions. Fixed costs stay the same whether you sell ten boxes or ten thousand: rent, salaries, insurance, a loan repayment and software. The calculator uses the cost per unit for variable costs and the fixed expenses box for the rest. If you are unsure where a cost belongs, ask whether it would disappear if you sold nothing for a month.
Using break-even to make decisions#
Break-even tells you how many units you must sell before you earn a profit. Here that is 179. If you only sell 420, a price rise of ₦200 would lift profit by ₦84,000 a month, while a cut in ingredient costs of ₦100 a unit would add ₦42,000. Try a few changes and see which has the largest effect. If your break-even is far above what you can realistically sell, change something: raise the price, cut costs or reduce fixed expenses. For pricing from a target margin, use the margin calculator.
Margin of safety and what-if tests#
Using the baker’s figures, the break-even is 179 boxes and sales are 420, so the margin of safety is (420 − 179) ÷ 420 = 57 percent. Sales could fall by that share before the business starts to lose money. Now test a price cut. Dropping the price by ₦300 to ₦3,200 lowers the profit per box to ₦1,100, which pushes the break-even up to 228 boxes. To make the same ₦338,000 profit as before, the baker would have to sell 535 boxes, a rise of 45 percent. A price cut only pays if it brings that much extra volume.
Gross profit is not what you take home#
Owners often forget to pay themselves a salary in their costings, or leave out the cost of their own time. Include a wage for yourself, set aside money for tax, and keep a reserve for slow months. Profit after tax is what is available to reinvest or withdraw. If the answer is negative, look at the three levers: price, cost per unit and volume. Use the margin calculator to see what price a given margin would need.
Frequently asked questions#
Subtract all costs from revenue. This calculator separates product costs from fixed expenses.
The number of units at which your sales cover all your costs, so profit is zero.
No. Profit is an amount of money. Margin is profit as a percentage of revenue.
Only if you enter a tax rate.