How to calculate net profit for a retail shop

Many shop owners know today's sales to the pound, but when asked «how much did I make this month?» the guessing starts. Learning how to calculate net profit for a retail shop is not complicated, but it needs the right order and recorded numbers. In this article we explain the formula step by step, apply it to an example in Egyptian pounds, and show where people usually go wrong.

Sales are not profit

A full drawer at the end of the day doesn't mean you made money. Part of that amount is the price of the goods themselves, and part will go to rent, salaries and electricity. Some of it may be a return that goes back to a customer. So we need three clear steps.

The formula step by step

• Net sales = sales − returns.
• Gross profit = net sales − cost of goods sold.
• Net profit = gross profit − expenses.

Cost of goods sold is the cost of the pieces you actually sold, not everything you bought this month. If you bought goods for 50,000 pounds and sold only half, the other half is still stock on the shelf, not an expense.

Expenses are the costs of running the shop: rent, salaries, electricity and internet, packaging and transport. Record your own personal withdrawals from the drawer separately so they don't mix with expenses.

A worked example

This is an invented example with round numbers, for illustration only, not a market average:

• Monthly sales: 200,000 EGP, returns: 10,000 EGP, so net sales are 190,000 EGP.
• Cost of goods sold: 133,000 EGP, so gross profit is 57,000 EGP (about 30% of net sales).
• Expenses: rent 15,000, salaries 20,000, electricity and internet 4,000, other 3,000, a total of 42,000 EGP.
• Net profit = 57,000 − 42,000 = 15,000 EGP.

Notice that the shop sold 200,000, but its net profit was only 15,000. That is the number that tells you whether the shop is really earning.

Why the cost method matters

Purchase prices change. Say you bought 10 bottles of perfume at 100 pounds, then 10 more at 120 pounds. What did the bottle you sold today cost?

• If you use the last price (120), your profit looks lower than it really is.
• If you use the first price (100), your profit looks higher than it really is.
• Weighted average cost combines both batches: 2,200 pounds ÷ 20 bottles = 110 pounds a bottle.

When you sell 5 bottles, their cost is 550 pounds. With every new purchase at a different price, the average updates automatically. This method gives a profit close to reality, as long as every delivery is recorded at its real cost.

Common mistakes when calculating profit

• Treating all purchases as an expense in the same month.
• Forgetting returns, or taking them off sales without putting their cost back into stock when the piece goes back on the shelf.
• Ignoring damaged and lost goods. Damaged stock is a real loss and should show.
• Mixing the owner's withdrawals with expenses or with sales.
• Working out profit from the selling price minus an «approximate purchase price» kept in your head.

How often should you calculate profit?

Calculate net profit at least every month, and review gross profit every week. Look at gross profit by item and category too: you may find an item that sells a lot but has a thin margin, and another that sells less but carries the shop's profit.

Compare each month with the same month last year if you can, not only with the month before, because seasons and holidays change sales a lot. Most important, the numbers themselves must be recorded daily: sales with invoices, returns linked to their invoices, and expenses recorded with their dates.

How CARMA HUB helps you calculate profit

• Weighted average cost per branch, updated with every supplier delivery.
• Profit and cost of goods sold reports, with returns taken off the same way in every report.
• Sales by item and category, with Excel export or PDF printing.
• A sales return decides per line whether the piece goes back to stock, and damage is recorded as a separate step.
• Seeing profit is tied to a permission, so a cashier doesn't see it unless you allow it.

Read also inventory software for your shop and treasury and register shifts. See all features, check the pricing, and try it free for 7 days with no card.