Retail profit is the difference between units bought and sold, but this does not account for other expenses such as storefronts, electricity, and employee salaries. A more accurate way to evaluate retail profit is to subtract all expenses from total net sales. Retailers must minimize expenses and price items to maximize profits.
Retail profit can be understood in a number of ways, but one simple explanation is that it is the difference between the units the retailer buys and the units sold. This is a very simple explanation and understanding exactly how a company reports profits, if profits are made, can be much more complex. What constitutes costs or expenses and what constitutes money made often depends on the specific retailer, although there are certain guidelines most businesses follow, especially when reporting profits to any form of tax agency.
The type of retail profit described in the first sentence of this article is inadequate in determining how much profit a company is actually making. This is because resellers have other expenses that exist outside of buying goods that they will sell to customers. They must own or lease storefronts, consume electricity, pay employees, maintain property, and account for loss of property due to theft. While it’s possible to get a sense of gross retail profit by simply subtracting the cost of items sold from their cost to the retailer, the figure isn’t very meaningful without accounting for these other expenses.
A more complex way of evaluating retail profit is to look at total net sales and then subtract all other expenses from that. Here, even net sales mean something different than total sales. Net sales also represent all items that have been returned and are damaged and unsaleable or have not yet been sold again. This figure is much more accurate, representing what the money actually made.
In retail net income accounting, a comparison of the specific items sold and all the money that is contributed to running the business gives a real sense of whether a store is actually making money. A profit is only made if net sales exceed expenses – when they don’t, this is treated as a loss rather than a profit.
Calculating actual retail sales can get much more complicated because retailers often invest money in items they haven’t sold yet. It might be one thing to subtract the cost of items from their sale price, but sometimes items don’t sell well or are discounted below their original sale price and are a loss when sold. If retail stocks don’t move quickly, stores can end up with deep discounts and clearances, and while that helps move stocks, it may not create any form of profit.
Retail profit can also be seen as one of the ways retailers determine what to carry and how to value what they carry. The goal is always to make a profit, because only then can a retailer stay in business. Smart retailers must determine how to minimize expenses and priced items to sell in order to maximize profits. They also typically use past earnings reports to set goals for the future profit percentages they want to achieve.
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