# How do you make pure profit

## Calculate profit

In this post we explain how you can calculate the profit of a company. To do this, we go into the respective formula and differences in internal and external accounting.

Are you more of the audiovisual type? No problem, please have a look at ours **Video ** to "calculate profit"!

### Calculating profit explained simply

The **Profit **, or also **Result**, a company arises from the **Difference in income and expenses**. If the result is negative, i.e. if the expenses are higher than the income, one also speaks of a loss.

### Calculate profit formula

The profit calculation differs in **external** and **internal accounting** something from each other.

### Calculation in external accounting

in the **external accounting ** there is a profit as soon as the **Income **higher than that **expenditure** are. Both **operational purpose-related** (e.g. sales, personnel expenses), as well as **external** (e.g. rental income, losses from stock trading) Cash flows offset to calculate profit.

### Calculation in internal accounting

The profit in **internal accounting ** is only calculated from the **operational purpose-related** Income and Expenses. One also speaks of **Sales / revenue** and from **costs**. With profit as a key figure, the profitability of companies can be controlled and inefficiencies can be remedied.

The proceeds are calculated from the **Selling price **times the **Sales volume**. The total costs, however, result from the **variable costs **times the **Production quantity** and the **Fixed costs **.

### Calculation of the contribution margin

The **contribution margin ** consists in the **Cost and performance accounting **from the excess of sales / revenues over variable costs.

It is therefore the amount that is available to cover all fixed costs. For profit determination, this means that the profit can also be calculated from the difference between the contribution margin and the fixed costs. So the calculation looks like this:

If you want to find out more about the contribution margin, have a look at our **Video ** to do this!

### Calculate profit example

A tool manufacturer produced 5,000,000 hammers in the last period, 4,900,000 of which were sold at a price of 10 euros. The manufacturer had expenses of 1 euro for the head pieces and 50 cents for the handles per hammer. In addition, he pays total wages worth 20,000,000 euros annually. In addition to selling the products, the company was able to generate EUR 50,000 through share trading in the last period.

Let's start by calculating the profit in the **internal accounting**. Only income and expenses related to the business purpose are taken into account here. Let's look at the formula again:

If you now divide the revenues and costs into their individual components, you get the following calculation:

In our simplified example, the variable costs are the expenditure for hammer heads and shafts, because their number varies with the production volume. The fixed costs form the salaries, which are determined independently of the production and sales volume. If you put all values correctly into the formula, you get a profit of 21,500,000 euros.

If you change the formula, you can also use the **contribution margin** determine. If you want to calculate the profit in this way, the converted formula looks like this:

The brackets give the contribution margin for the period. If you now insert the numbers, this results in a value of 41,500,000 euros. The calculation of the profit logically results in 21,500,000 euros here as well.

In contrast to controlling, the **Bookkeeping **(external accounting) when determining profits, both the operating purpose-related as well as the non-operating income and expenses. In our example, income from stock trading is one of the non-operational cash flows. Let's look at the formula again:

So to get the income, we just have to add the income to the share profit. In our simplified example, the expenditure is the same as the costs from internal accounting. This results in a profit of 21,550,000 euros. The final calculation looks like this:

### Difference between internal and external accounting

You see, even though it's the same term, the profit is different in the **internal ** and in **external accounting ** from each other. If you want to know exactly what the difference between internal and external accounting is, take a look at ours now **Video ** for accounting!

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