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New business owners often fail to see the essential economics of their company. And while it may sound like an obvious concept at first, many people never manage to understand how to properly balance their books. Filling in the blanks on how to calculate profit and loss can lead to smaller short-term losses that will help put your company on a better long term track. Together, we're going to delve into what's known as the “proprietorship” model. In this instance, our proprietor is equivalent with our proprietor in law -- a person who owns property and makes decisions for it without limit of control from other people or legal entities. We're going to deal with the standard set of business, but if you're dealing with a partnership, then you must also consider how the partners are considered joint proprietors. The first step in figuring out your profit margin is to make sure you know what your sales are. Basically, this means you need to estimate how much money has been generated by the product or service that your business offers. If it's an up-hill climb industry, then it's recommendable to start with the minimum amount you think you'll need in order to survive -- just in case things fall through. Get that figure down on paper and then use that number when calculating your other box steps along with paying yourself a decent salary. Once you have an idea of the exact amount of money that's been raised, then you can begin thinking about what percentage it totals. This number will be your “gross profit margin”, which is calculated by dividing the gross margin (which is your revenue minus your cost of goods sold) by the cost of goods sold (which is simply the price per unit multiplied by the quantity produced). Just like in accounting, you need to make sure that each box gets accounted for -- but this time it's how much profit was made on each unit. Now that you have some idea how much profit is being made out on every item, then it's time to figure out how many units are being produced. The easiest way to do this is to take the total revenue of the company and divide it by the cost of goods sold. this will give you a figure for how many times your business is being sold. Once you have that number, then it's time to do some math based on the profit margin of each item. To be effective on keeping your books accurate, you need to divide your profit margin by your quantity on sale. For example, if your profit margin totals 10% then 10% needs to be divided by 100 (making it .1). When you have that number, then you can multiply that with the quantity of items on sale in order to get more of a real figure of how much money is being made per item. To help you out, we've written out a nice little example of how to make sure your profits are accurate. To start, we need to know the total revenue of your company. If this is $1000 dollars it's going to be relatively easy because you simply divide the figure by the number of units (100) and get a figure like 10%. Next, we're going to divide our cost of goods sold by the price per unit (let's say it's $10) and then we multiply that with our quantity sold to get an answer that will be much more similar in terms of what you'd expect -- in this case it will be 10/10=1/.1=1 unit per dollar given the price per units. cfa1e77820
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