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As a small business owner, there are times when you're likely to find yourself in need of some bookkeeping – whether you’re completing a Self Assessment, exploring ways to improve profitability or gearing up for an expansion or funding.
Accounting can seem daunting. But you don’t have to be an accountant to understand your business’ financial performance.
In this guide we explain five important accounting formulas, how they're calculated and when your business might use them:
And our easy-to-use calculator lets you quickly work out each formula, helping you understand your company’s financial health in minutes.
Cost of goods sold
Cost of goods sold refers to how much it costs to create the goods or provide the services that your business sells. You might see cost of goods sold abbreviated to COGS or referred to as the cost of sales or cost of services.
Knowing cost of goods sold can help your business set the right price for its products. The calculation is also used within other accounting formulas that give you further insight into your company's financial performance.
The cost of goods sold formula:
Beginning inventory + purchases of inventory − ending inventory = cost of goods sold
|Beginning inventory||The value of the inventory you have in stock at the start of the accounting period.|
|Purchases of inventory||How much it costs to purchase new inventory throughout the accounting period.|
|Ending inventory||The value of the inventory you have available for sale at the end of the accounting period.|
Gross profit margin
Gross profit margin calculates how much money is left from the sale of your goods or services, once you've taken into account how much it costs to produce your goods or deliver your services.
Gross profit margin is often expressed as a percentage, showing gross profit as a percentage of net sales.
This calculation is commonly used to understand the profitability of a product. You can use it to identify your most lucrative products and how efficiently you're using your resources to produce your goods or services.
The gross profit margin formula:
(Sales − cost of goods sold) / sales x 100 = gross profit margin
Net income is your business' profit for the accounting period, considering all costs and expenses such as salaries, advertising, tax expenses, insurance and overhead.
It's expressed as an amount rather than a percentage, and you might hear net income referred to as net profit, net earnings or the "bottom line".
The net income formula:
Revenue − cost of goods sold − expenses = net income
Break even point
Understanding your break even point allows you to know how many sales you need to make to cover your costs or make a profit. Any sales above the break even point represent profit.
This calculation could allow you to forecast how long it may take until your business will generate a profit, how much you need to invest to break even, or whether you should consider reducing costs or increasing prices to get to a point of profitability sooner.
The break even point formula:
Fixed costs / (sales price per unit − variable cost per unit) = break even point
|Fixed costs||Everyday, recurring expenses such as rent, payroll, insurance premiums and utilities.|
|Sales price per unit||How much you charge for your product or service.|
|Variable cost per unit||The cost of the materials and labour in order to create your product or service.|
Return on investment
Perhaps the most familiar formula in this list, return on investment (ROI) allows you to understand how much you’ve made from a business investment. An investment may be anything from money spent on marketing, investment in another company or even purchasing new machinery or equipment.
Calculating return on investment can help you draw comparisons between different investments or decide whether to continue investing in a particular activity.
The return on investment formula:
(Amount generated − cost of investment) / cost of investment × 100 = return on investment
Accounting formula calculator
Work out COGS, gross profit margin, net income, break-even point and ROI in no time, and get a quick overview of your business' financial health.
Growing your business?
If you’re looking to grow your business, whether that’s taking on more staff, expanding into new industries, launching in new markets or even looking for funding, it’s important to make sure your insurance is up to date.
Superscript provides flexible insurance by monthly subscription that you can tailor to the needs of your business, and make changes to your policy whenever you need without fees.
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This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.