Entrepreneur Explains How to Calculate Your Real Business Profit

Making sales is often seen as a sign that a business is doing well. However, a high number of sales does not always mean that an entrepreneur is making good profits.

Many small business owners focus on the amount of money coming into the business without carefully calculating how much they spend to keep the business running. According to entrepreneur Sarah Khaemba, this can make business owners believe they are making more money than they actually are.

Khaemba, the founder of Rechos Fashion Sense, has advised entrepreneurs to consider all business expenses before calculating their actual profit.

She has operated her fashion business in Nairobi’s Central Business District for the past 12 years and shared her experience during this week’s episode of the Co-op Bank Youth Forums.

The session was held under the theme, “Buy Smart, Sell Smart: Getting Better Deals and Maximize Profit,” and focused on helping young entrepreneurs improve how they buy stock, negotiate with suppliers and set prices.

Khaemba said one of the most important steps for any entrepreneur is to know the total cost of getting a product ready for sale.

This means business owners should not only look at the price they paid for the stock. They should also include other expenses that come with bringing the product into the business and eventually selling it to customers.

These costs may include the purchase price of the stock, transportation from the supplier, delivery charges, rent, electricity and other operating expenses.

Other small costs that may appear insignificant should also be included when calculating the final profit. If they are ignored, they can gradually take away a large portion of the money a business makes.

Small Expenses Can Reduce Business Profits

Khaemba particularly warned entrepreneurs against ignoring transaction and delivery charges.

She explained that businesses can spend thousands of shillings on small transaction fees without realizing how much the costs have accumulated over time.

“You can find you have spent like Ksh36,000 in transaction fees for deliveries and the rest. Those Ksh7 or Ksh15 add up quickly,” Khaemba said.

For example, a business owner may consider a Ksh7 or Ksh15 charge too small to affect the business. However, when the same charges occur hundreds or thousands of times, they can become a significant expense.

This is why entrepreneurs should record their transactions regularly instead of waiting until they have forgotten many of the expenses they incurred.

Khaemba recommended keeping daily stock records and carrying out proper accounting at the end of every month. Such records can help business owners understand where their money is going and identify expenses that may be eating into their profits.

Revenue Is Not the Same as Profit

The entrepreneur also stressed the importance of understanding the difference between revenue and profit.

Revenue is the total amount of money a business receives from selling its goods or services. Profit is the money that remains after the costs of running the business and selling the products have been deducted.

For instance, if an entrepreneur sells 10 products and receives Ksh20,000, it would be wrong to assume that the business has made Ksh20,000 in profit.

“The Ksh20,000 is not a profit. Your profit is somewhere in there,” Khaemba explained.

The entrepreneur must first deduct the amount spent on purchasing the products. Other costs, such as transportation from the supplier, delivery expenses, transaction charges, rent and other operating costs, should also be considered.

Only after these expenses have been accounted for can the entrepreneur determine how much money the business has actually earned.

Entrepreneurs Should Track Every Business Expense

Khaemba’s advice highlights the importance of proper financial records, especially for small businesses where the owner often handles purchasing, sales, deliveries and accounting.

Keeping proper records can help entrepreneurs avoid spending business money without knowing whether they are still making a profit.

It can also help them identify products that generate higher returns and those that may be selling well but provide very little profit.

For example, a product may have many customers because it is affordable and sells quickly. However, if the cost of purchasing, transporting and delivering the product is high, the business may be making very little from each sale.

Entrepreneurs should therefore look beyond the number of products sold and calculate the actual amount earned after all expenses have been removed.

Do Not Choose Suppliers Based Only on Price

Khaemba also encouraged young entrepreneurs to be careful when selecting suppliers.

She said business owners should not automatically choose the supplier offering the lowest price. A cheaper product may sometimes come with additional costs or problems that eventually make it more expensive.

Entrepreneurs should compare suppliers based on several factors, including the quality of the products, delivery charges, payment terms, minimum order quantities and return policies.

A supplier offering slightly cheaper goods may not necessarily be the best option if the quality is poor or if the supplier has expensive delivery charges.

Similarly, a supplier with a slightly higher price could offer better-quality products, flexible payment arrangements or a reliable return policy, which may benefit the business in the long run.

Smart Buying Can Help Increase Profit

The entrepreneur’s message to young business owners is that making profit starts long before a product reaches the customer.

Entrepreneurs need to make smart purchasing decisions, understand their costs and set prices that allow them to cover expenses while still making a reasonable profit.

Regular stock-taking and financial records can also help business owners know which products are moving quickly and which ones are taking too long to sell.

By understanding the full cost of doing business, entrepreneurs can make better decisions about pricing, suppliers, stock levels and daily spending.

For small business owners, the lesson is simple: sales alone do not tell you whether your business is profitable. You need to subtract all the costs involved before you can know your real profit.

Careful record-keeping, smart purchasing and proper pricing can help entrepreneurs protect their money, reduce unnecessary expenses and build businesses that remain profitable over the long term.

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