Calculating profit is a key aspect of running a successful POS (point of sale) business in Nigeria.
With the right profit calculation methods, POS owners can make data-driven decisions to optimize their operations and maximize earnings.
This article provides an overview of profit calculations for POS companies operating in the Nigerian market.
We will explore the key concepts and formulas to accurately track profitability across products, locations, and time periods. Understanding your true profit levels is the first step to identifying opportunities for growth and improvements in your business.
Understanding revenue and costs in POS business
To calculate profit effectively for a POS business in Nigeria, you need to have a clear grasp of your main revenue sources and costs involved.
Key revenue sources in a POS business include:
- Sales of products/inventory – This likely makes up the bulk of revenues. Tracked by recording individual sales transactions.
- Fees from services – Some POS systems charge small fees for bill payments, deposits, transfers etc.
- Rentals – Revenue from renting POS equipment or space to third parties.
- Advertising/promotions – Some POS systems charge retailers to advertise in store or on receipts.
On the cost side, main expenses include:
- Cost of goods sold – This includes purchase costs of inventory sold during a period.
- Rent – Monthly or annual rental costs for store/kiosk locations.
- Staff costs – Wages, salaries, benefits and allowances paid to employees.
- Supplies – Things like receipt paper, packaging, office supplies etc.
- Hardware costs – Maintaining and upgrading POS machines, printers etc.
- Software and licensing – Fees for POS software, payment processor charges etc.
- Utilities – Electricity, water, internet and other utility bills.
- Marketing – Advertising, promotions and branding costs.
- Insurance – Premiums paid for business insurance policies.
- Repairs and maintenance – For equipment, furnishings and other assets.
To calculate profit, start by tracking total sales revenue from all sources. Then deduct the total costs involved in generating those sales. The difference is your net profit.
Accurately recording sales transactions and purchases is critical for getting the revenue and cost of goods sold figures right. Regularly update inventory counts and supplier prices as well.
Tracking daily sales and transactions
Carefully tracking daily sales and transactions is crucial for determining revenues and profitability over time in a POS business. Here are some tips for recording daily sales:
- Use POS software to log each transaction – Most POS systems automatically track sales, payments, inventory etc. The data is stored and can be accessed through back-office software.
- Take periodic Z-reads – Z-reads record the total value of transactions at a given time. Take one in the morning and evening to reconcile against system data.
- Log cash/credit sales separately – Note cash sales immediately and batch credit card settlements daily.
- Record refunds and discounts – Logging both item returns/refunds and any discounts or promotions applied.
- Track tips – If accepting tips, note daily amounts for reporting.
- Account for other revenue streams – Don’t forget revenues like bill payments and commissions in daily totals.
- Store supporting documents – Keep all receipts, batch reports, and bank deposit slips for future reference.
- Back up digital records – Download data backups from POS and accounting software in case of system failures.
- Perform daily reconciliation – At end of day, reconcile system data against Z-reads, cash totals and other documentation.
- Identify and log discrepancies – Note any overages or shortages identified and investigate/correct them.
- Analyze sales data regularly – Review reports to identify sales patterns, top-selling items, busy times etc. to inform business decisions.
With an accurate daily sales logging process, you have the information needed to calculate revenues and cost of goods sold over any time period.
This enables you to determine profit margins and analyze for performance improvements.
Managing inventory and purchases – tracking stock levels and supplier costs
Managing inventory effectively is vital for a profitable POS operation. Here are some tips for tracking inventory and supplier costs:
- Set up inventory system – Use POS software or separate system to record inventory quantities, prices, suppliers etc.
- Take regular physical counts – Count stock on hand periodically and reconcile against inventory records to correct discrepancies.
- Log all receiving – When new inventory arrives, immediately update quantities received and costs in the system.
- Enter supplier invoices – Record invoice dates, quantities and amounts owed for inventory purchases.
- Apply LIFO accounting – Using last-in-first-out accounting matches current revenues against most recent purchase costs.
- Track order frequency – Note dates and quantities ordered for each product from each vendor.
- Identify fast/slow-movers – Analytics to pinpoint which products sell fastest and slowest.
- Monitor stockouts – Track instances of being out-of-stock for key items so you can adjust ordering.
- Review supplier terms – Check for order minimums, lead times, discounts etc. when negotiating or reviewing contracts.
- Compare supplier pricing – Regularly review competitor supplier rates and consider switching if better deals are available.
- Set par stock levels – Determine minimum quantities to keep in stock for each product to prevent stockouts.
- Place orders based on usage – Use historical sales velocity and lead time data to calculate order quantities and frequencies.
- Practice just-in-time ordering – Place smaller, more frequent orders to reduce inventory carrying costs while preventing shortages.
With robust inventory management procedures, you can accurately determine the cost of goods sold during any time period. This helps calculate profit margins for both your overall business and individual products.
Calculating profit margin on products – how to determine profit margin for each product
Calculating profit margin by product is key for identifying your most profitable items versus low performers in a POS business. Follow these steps:
1. Determine time period
Choose the specific time frame you want to analyze – e.g. daily, weekly, monthly or annually.
2. Calculate revenue for each product
Pull sales reports showing revenues per product for the chosen period. Include all sales channels like in-store and online.
3. Determine units sold per product
Check inventory or POS reports to count the number of units sold for each product during the period.
4. Determine cost of goods sold per product
Use your inventory accounting data to calculate the total cost paid for the units sold of each product.
5. Calculate profit margin percentage
Use this formula for each product:
Profit Margin % = (Revenue – Cost of Goods Sold) / Revenue
6. Compare product margins
Once you have the percentages, rank products from highest to lowest margin to see which are most profitable.
7. Set minimum margin thresholds
Determine what minimum percentage you want to maintain for each product category or overall.
8. Identify low performers
Look for products that fall significantly below your desired profit margin levels.
9. Assess opportunities
For low margin items, consider adjusting purchase costs, increasing sales prices or discontinuing products.
10. Optimize pricing strategies
Consider tactics like bundling high and low margin items to improve overall basket profitability.
11. Refine over time
Continue monitoring your profit margins periodically, adjusting prices and products to maximize profitable sales.
Analyzing profitability by product allows you to make smarter decisions to optimize your offerings, pricing and promotions for higher overall business profitability.
Analyzing profitability by location – break down profitability by different stores/outlets
If you operate multiple POS outlet locations, breaking down profitability by location can provide valuable insights into your business performance. Follow these tips:
Track sales separately for each location
Your POS system should record transactions by store or kiosk location. If not, create a process to log this.
Maintain separate inventory for each location
Keep inventory for each outlet separate, do not co-mingle stock between locations.
Track costs by location
Allocate out costs like rent, payroll, supplies etc. to each site.
Calculate revenue for each location
Pull sales reports by location for target time period – daily, weekly etc.
Determine units sold per location
Use inventory/transaction reports to sum units sold per product by location.
Calculate cost of goods sold by location
Based on units sold and inventory allocated per site.
Determine profit margin % by location
Use formula: (Revenue – COGS) / Revenue
Compare locations
Rank locations by profitability levels and look for patterns or outliers.
Identify high/low performers
Determine which locations consistently have highest/lowest margins.
Assess foot traffic differences
Consider how customer volume, store size etc. affect performance.
Evaluate pricing variances
Look for big differences in product prices or promotions by site.
Review inventory allocation
See if some locations tend to face more stockouts than others.
Analyze operating costs
Check for notable variations in payroll, rents, maintenance etc.
Refine inventory and pricing
Make adjustments to optimize inventory and pricing by location.
Improve cost efficiencies
Identify ways to control operating costs at lower-performing locations.
Monitoring profitability across locations enables you to identify your highest and lowest performing stores. You can then develop strategies tailored to each location to maximize overall business profitability.
Key Takeaways
- Accurately tracking revenues and costs is crucial for determining profitability in a POS business.
- Key revenue sources include sales transactions, fees, rentals and advertising. Main costs are COGS, rent, payroll, supplies and more.
- Carefully log daily sales and transactions using Z-reads, software data and reconciliation.
- Managing inventory with physical counts and LIFO accounting allows you to accurately determine COGS.
- Analyze profit margin by product to optimize pricing and offerings for profitability.
- Compare profitability across locations to identify high/low performers and tailor strategies per site.
- With robust reporting and analysis, you can make data-driven decisions to maximize profits.
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