• Start by calculating the company’s net sales value

While profit is defined as revenues minus expenditures, these values ​​are calculated using multiple sources of revenues and expenditures. Thus, if you want to start from scratch when calculating your company’s profits, you may need to check multiple sources of revenues and expenditures.

In this section, we will provide a breakdown of the company’s revenues and expenses to calculate profits.

We will start with net sales, which is the money earned as a result of the sales of goods and services, less accounts receivables, discounts and the value of damaged or lost goods.

To illustrate the process of analyzing expenses and revenues, we provide the following example:

Let’s say you own a small company that sells high-end sports shoes. During this quarter of the year, the company sold 350,000 riyals worth of profits, but due to defects, have been forced to collect 10,000 riyals in Accounts receivable. It also had to pay QR 2,000 in refunds and deductions.

In this case, our net sales are 350,000 – 10,000 – 2000 = 338,000 riyals.

• Deduct the sales cost to obtain gross income

Companies must spend money to make profits. Products are manufactured from raw materials. Raw materials and labor cost the company money to manufacture and sell the final product. This cost is called the cost of goods sold and includes the cost of raw materials and labor directly related to the manufacture of the sold product, but excludes indirect expenses such as distribution, freight and sales team salaries.

In the example of a sports shoe company, the company needs to buy rubber and textile for the production of shoes and needs to pay factory workers to assemble raw materials and convert them into wearable products. Assuming that the cost of fabrics and rubber is QR 30000 and that workers’ wages are QR 35,000 for this quarter, the factory’s gross income will be 338,000 – 30,000 – 35000 = 273000 QR.

Please note that if a company does not sell physical products (for example, if the company is engaged in consulting services), a similar value is used for the cost of sales and is called the cost of revenue. The cost of revenue includes all direct expenses relating to sales, such as labor costs and sales commissions, but exclude indirect expenses such as staff salaries, rent, utilities, etc.

• Subtract all operating expenses

The company does not only spend money to sell services or products to customers. The company must also pay employees for their marketing efforts and other activities.

These expenses are defined as operating expenses that are necessary to maintain business operations but are not directly related to the process of manufacturing the products or providing services.

In the case of the sports shoe company, let’s assume that the salaries of employees (sales team, managers, etc.) all amount to QR120,000. The company also paid 10,000 riyals in rent and utilities and spent 5000 riyals on advertisements in business magazines. If all these expenses represent all operating expenses, then: 273000 – 120000 – 10,000 – 5000 = 138000 riyals.

• Deduction of depreciation and amortization costs

Once you deduct your operating expenses, you will need to deduct depreciation and amortization costs. Depreciation is related but not synonymous to amortization, where depreciation represents the loss of tangible assets such as equipment and tools as a result of depreciation from normal operations over the life of the asset. Amortization represents the loss of intangible assets such as patents and copyrights over the life of the asset. When these expenses are deducted from the above total after deduction of operating expenses, you will obtain the operating income.

In the above example, let’s assume that the machines used to manufacture shoes cost 100,000 riyals and have a life span of 10 years. Assuming that depreciation is ongoing, the value of the machine will decrease by QR10000 per year, or QR 2,500 per quarter. If this represents the only depreciation / amortization costs, we can deduct operating expenses: QR 138,000 – 2500 = QR 135,500.

• Deduct any other expenses

After that, you will need to deduct any extraordinary expenses that cannot be attributed to normal business operations. These expenses may include interest on loans, repayment of debts, purchase of new assets among other costs. These expenses vary from one accounting period to another, especially if the company’s business strategy is constantly changing.

Suppose that a sports shoes company is still repaying the loan that you secured to create the company. In the last quarter of the year, the company paid 10000 riyals in loan installments. The company also purchased a new machine for the shoe industry at a cost of QR 20,000. If this value represents all additional expenses during the quarter, we can deduct them as follows: 135500 – 10,000 – 20000 = 105000 QR.

• Add one-time revenues

In addition to extraordinary expenses, companies can obtain one-time revenue as a result of business deals with other companies, selling tangible assets such as equipment and intangible assets such as copyright and trademarks.

Suppose that in the last quarter, the company sold the old shoe maker machine for 5000 riyals and licensed its logo for use by another advertising company for 10,000 riyals.

In this case, we will add one-time revenues to the total amount as follows: 105500 + 5000 + 10000 = 120500 QR.

• Deduct taxes to calculate the net income

After all income and expenses are accounted for, taxes are deducted as the final expenses on the income statement.

Please note that taxes may be imposed on the company by more than one government agency. In addition, tax rates vary based on the company’s business scope and earnings.

Once you deduct taxes, the remaining value represents the company’s net income, which you can use as you wish.

In the following example, let’s assume that the company was charged a tax of QR 30,000. After deducting these taxes (120,500 – 30,000 = QR 90,500), we obtain the company’s net income, which means the firm achieved a profit of QR 90,500 during the quarter.

Notes:

• Make sure all operating expenses are accounted for. Ads, business cards, and international calls can cost you a lot of money and represent a significant amount when you add them together.
• It should be noted that you can determine net profit by calculating the percentage of the selling price which eventually becomes a profit value. In other words, divide operating profit by net income to obtain a percentage. For example, if net sales amount to 1000 riyals with sales cost of QR300, and total operating expenses of 200 riyals, the profit margin will be 1000 – 500 = 500 riyals; the profit percentage is 500/1000 = 0.5%