How to calculate profit for a small shop (gross vs net)
Short answer: gross profit is your sales minus what the sold goods cost you. Net profit is gross profit minus your running expenses like rent, electricity and salary. Margin is profit divided by sales, times 100.
The three formulas
- Gross profit = Sales - Cost of goods sold
- Net profit = Gross profit - Expenses
- Margin % = Profit / Sales x 100
Cost of goods sold is only the cost of the items that left the shop this period. It is not everything you bought from the supplier.
Worked example: one month of a corner shop
In March the shop sold goods for $4,800. Those goods had cost $3,360 to buy.
- Gross profit = $4,800 - $3,360 = $1,440
- Gross margin = $1,440 / $4,800 = 30%
Expenses that month: rent $400, electricity $90, helper's salary $500, transport $60. Total $1,050.
- Net profit = $1,440 - $1,050 = $390
- Net margin = $390 / $4,800 = 8.1%
So out of every $100 of sales, $30 is left after paying for the goods, and about $8 is left after paying for the shop. Many owners see the $1,440 and think it is all theirs. It is not until the $1,050 is paid.
Why profit must use the cost at the time of sale
Supplier prices change. If you recalculate old sales with today's cost, your old profit changes too, and your reports stop matching what really happened.
Example: in March you sell 30 bottles of oil at $1.50. They cost you $1.00 each, so March profit is 30 x $0.50 = $15. In April the supplier raises the price to $1.20. If March is recalculated with $1.20, March profit becomes 30 x $0.30 = $9. That $6 never disappeared in March. Save the cost price with each sale and old months stay true.
Common mistakes
- Counting restock as an expense. Stock purchases go into cost of goods when sold. Adding them to expenses subtracts them twice.
- Using the selling price of stock as profit. A full shelf is not profit until it sells.
- Forgetting small expenses. Bags, tea for staff and phone top-ups add up to real money each month.
- Ignoring discounts. Record the price actually paid, not the tag price.
- Mixing credit with cash. A credit sale is a sale. The unpaid amount is a separate list, not lost profit.
- Taking money from the till without writing it down. Your own drawings are not a shop expense, but they explain why cash and profit differ.
Doing this with Tillbox
Tillbox saves the cost price with every sale, keeps a weighted average cost when you restock, and lets you record expenses by type. Reports for any day, week, month or year show sales, cost of goods, gross profit, expenses, net profit and margin. All periods and CSV or PDF exports are open with nothing locked.
FAQ
Is the money in my cash box my profit?
No. Cash in hand mixes sales, credit you have not collected, money you put in and money you took out. Profit is sales minus cost of goods minus expenses for a period.
Should restock purchases count as expenses?
No. Stock you buy is an asset until it sells. Its cost enters profit only as cost of goods sold when the item is sold. Counting it as an expense too subtracts it twice.
Do credit (udhar) sales count in profit?
Yes, on the day of the sale. The profit is earned when the goods leave the shop. Track the unpaid amount separately so you know how much cash is still to come.
What is a good net margin for a small shop?
It depends on the trade. Grocery and kirana stores often run on thin net margins of a few percent, while boutiques and accessories can be higher. Compare your own months, not other shops.