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What Is Retail Profit?

Retailers try to maximize profits.
Article Details
  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 28 March 2014
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    Conjecture Corporation
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Retail profit can be understood in different ways, but a simple explanation is that it is the difference between units purchased by the retailer 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 depend on the specific retailer, though there are a few guidelines that most companies follow, especially when they report profits to any form of tax agency.

The type of retail profit described in the first sentence of this article is inadequate when determining the profit a company is actually making. This is because retailers have other expenses that exist outside of the purchase of goods they’ll sell to customers. They have to own or rent storefronts, consume electricity, pay employees, maintain property and account for property loss from situations like theft. While it’s possible to get a sense of gross retail profit just by subtracting the cost of items sold from their cost to the retailer, the figure isn’t very meaningful without taking these other expenses into account.

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A more complex way of evaluating retail profit is to look at total net sales and then subtract all other expenses from them. Here, even net sales means something different than total sales. Net sales also account for any items than have been returned and that are damaged and unsaleable, or haven’t yet been sold again. This figure is much more accurate, representing what money was actually made.

In an accounting of net retail profit, a comparison of the specific items sold and all the money that is contributed toward running the business give a true 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 considered a loss instead of a profit.

Calculating actual retail sales can get much more complicated because retailers often invest money in items that they haven’t yet sold. It may be one thing to subtract 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 stock doesn’t move quickly, stores can end up using sharp discounts and clearances, and though this helps move the stock, it may not create any form of profit.

Retail profit can also be viewed as one of the ways retailers determine what to carry and how to price what they carry. The goal is always to make profit, because only then can a retailer stay in business. Smart retailers have to determine how to minimize expenses and price items to sell so that profit is maximized. In addition to this, they usually use reports on past profits to set goals for future profit percentages they wish to achieve.

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