A simple way to calculate the profit made in a shop

 By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

13 February 2011

Last week we saw how a shopkeeper should calculate the profit from goods sold during a day. In the simplified trading scenario, the trader bought bread at Sh25 each and sold it at Sh30. After selling 15 loaves in a day, he gross profit came to Sh5 x 15 = Sh75.

This easy calculation only works when the trader is dealing in one product only, but that is rarely the case. When there are several different items in the shop, doing the workings this way can be tedious.

One way of simplifying the calculation is for the trader to decide to add a constant percentage to the cost of buying a product in order to get the selling price. For example, a cosmetics trader once told me that he adds 35 percent to his products. That way, he knows the money he has made at the end of each day simply working backwards.

The “backward” calculation is actually not straightforward! If an item is bought at, say Sh100, it will be sold at Sh135. So, the cosmetics trader knows that for every Sh135 in sales at closing time, Sh35 is his money.

Now how do we get from Sh135 to Sh35? Answer: we divide it by 135 and multiply the result by 35. Therefore, if day’s sales are Sh15,000, the trader’s “gross” profit will be: Sh15,000 divided by 135 (= Sh111.11) and then multiplied by 35. The answer is Sh3,888.90.

The above calculation assumes that the trader does not allow any bargaining by customers. But this is Kenya; it is in our culture to bargain – I do it all the time; even in supermarkets! If some of the items are sold at a lower price than that marked, then this calculation will no longer be valid.

However, the method of adding a constant percentage margin is helpful in a bargaining society like Kenya. With the price fixed this way, a trader can quickly get the buying cost of an item and therefore know how far down to go.

Let me illustrate with the same example as above: an item is bought at Sh100 and then sold at Sh135. If the same constant percentage method is used for all the other products, then it is clear that for every Sh135 in the selling price, Sh100 is the buying price.

We ask the same question as before: how do we get from Sh135 to Sh100? Answer: we divide by 135 and multiply the result by 100. In other words, we divide by 1.35.

So, when a customer begins to bargain, the trade will get his calculator and divide the marked selling price by 1.35. The answer will be the buying price. Now he is in a position to make a counter offer knowing the absolute minimum he can accept.

What if the trader is not able to fix a constant percentage for all the products? How does he calculate the total gross profit? Wait for the answer next week…