Do you ever wonder how much you actually earn from your small business, and how much you could earn? Financial accounting is a crucial part of any business. This is because it helps you keep track of your earnings and expenses to see how much you bring home at the end of the day. 

Finding your small business’ maximum profit, in particular, can help you understand how to improve your performance. But if you’re wondering how to calculate maximum profit in accounting, you’re not alone. 

This guide will discuss maximum profit in accounting, including: 

  • What maximum profit means
  • Why maximum profit is important to small businesses
  • How to calculate maximum profit in accounting 

What maximum profit means

Maximum profit, or profit maximisation, is the process of finding the right price for your products or services to produce the best profit. You can calculate it using your revenue and expenses to estimate profit based on sales and price at different levels. 

Calculating maximum profit means you may estimate different prices based on the amount a customer buys. For example, if you sell a cupcake at £2, say you make £1 profit off that single product. But, if you sell 12 cupcakes at £1.50 each, you would earn 50p per unit and make £6. Though you earn less per product, your profit is greater overall. 

Here, you’re decreasing the profit margin, or gap between the cost of sale and the selling price, as the product amounts increase. This way, customers are more likely to buy more products at once. Still, you may have to estimate or research the product demand. Will someone want to buy it in bulk?

Aside from price variation, profit maximisation allows you to test different product prices against your business expenses. As a result, you will understand how your current pricing promotes profitability and if you should change it. 

Why maximum profit is important to small businesses 

Knowing how to calculate maximum profit in accounting is important to your business’s earning potential. It is a great way to find the right balance between affordability for the customer and earnings for you. Better prices will promote sales. But you’ll also need enough of a margin to turn a profit. The ideal price will increase your business’s profitability and, as a result, help it grow. 

To look towards the future of your business, it’s good to test your current price list to find where you can improve it. You can use this information to see where you can cut down expenses to make more profit. 

Understanding what to expect from your business will help when it comes to reporting income for taxes. When you increase earnings through profit maximisation, you can expect to pay more towards income tax. Knowing what to expect will help you maintain accurate records.  

Overall, being aware of your current profits and how you can improve them will help you stay on top of your operations and set realistic short-term and long-term earning goals. Organised and well-planned businesses can work towards good results and value. 

How to calculate maximum profit in accounting 

Once you know how maximum profit can help your small business, you may wonder how to calculate it for yourself. We’ll cover how to get started. 

Organise your finances

A big part of knowing how to calculate maximum profit in accounting is having clear financial records to help you understand your expenses and profit. This way, you can find ways to improve with profit maximisation.

To stay on top of your finances, you’ll need the right accounting software. Apps like Countingup’s two in one business account and accounting software will help you keep everything in one, easy-to-access place. Countingup’s app also offers tools that save you time and help you understand your money better. 

Instead of manually tracking your business expenses, Countingup offers automatic expense categorisation using HMRC approved categories. Plus, the receipt capture tool lets you take a picture of your receipt as soon as you get it so you won’t have to worry about it later. 

Aside from this, Countingup’s app lets you create and process unlimited invoices on the go. It notifies you when you receive invoices and automatically matches them to payments. These tools help you track your earnings and expenses, so you can easily calculate maximum profit and plan for the future of your business. 

Find your profit

Using your price list and financial data, outline each of your products and sales or estimated sales. Then mark the price of each product and set these against your expenses. 

Once you have everything in order, calculate your current profit, which is your revenue minus your expenses. You could either calculate your net profit or gross profit. Net profit is your total revenue minus cost of goods while gross profit is your total revenue minus total expenses. If you have high operating expenses, including debt and taxes, you may want to factor that in by using gross profit when you calculate maximum profit. 

Calculate maximum profit 

To calculate maximum profit, subtract your expenses from your product supply and potential revenue. Then, alter the prices and compare different price points to see what may bring you the most profit. If you reduce the price as the units increase, how will that affect your takeaway? 

When doing this, keep in mind that customer demand will play a role in its profitability, so you may want to forecast it. Learn more about forecasting customer demand here. There are also some products that make more sense to buy in bulk. For example, you may sell a few dozen cupcakes at a reduced unit price. But, if you sell something more expensive, like cameras, customers may only want one. 

That’s why it’s important to consider demand when altering the product prices to determine maximum profit. It can be useful to look at a similar product’s prices and sales numbers. Will these prices increase the likelihood of sales to increase profitability? 

Drawbacks of maximum profit 

Though maximum profit is useful for your small business earnings, there are some drawbacks. For example, the calculations can be vague because there is no set profit type. Plus, profit maximisation only focuses on the profit of a product as it affects business value. Profit maximisation doesn’t consider other factors such as the product’s quality or how the value of money changes over time. 

So, on top of calculating maximum profit, consider looking at other perspectives to help increase profitability. This can help you earn the most for your business. 

Track your business profits with Countingup

The Countingup business account comes with free accounting software that helps thousands of small businesses keep on top of their financial management. Designed specifically for one-person businesses, this unique two-in-one app makes running your business much easier.

The app automatically generates running profit and loss insights to help you calculate maximum profit.   

Keep your business finances running like clockwork. Download the Countingup app today.