Sales are not profit: how a distributor works out real profit

“We did ₹45 lakh this month.” That is sales. It sounds good, and it says almost nothing about whether the business made money. Many distributors grow their sales every year and still feel short of cash. The reason is usually somewhere between the sales figure and the profit figure.

Step 1: Gross profit

Gross profit is sales minus what those goods cost you to buy. Use the price you actually paid, after the company’s discounts, not the printed rate.

Example: sales ₹10,00,000. Cost of those goods ₹9,30,000. Gross profit = ₹70,000 (7% of sales).

Watch for anything that reduces this without showing up as a cost: a discount given at the counter, a free piece not on the bill, a price typed lower than the list. Our guide on where a distributor’s margin goes covers these.

Step 2: Running costs

Add up everything it cost to run the business for the same month:

• Salaries: salesmen, drivers, helpers, office, godown
• Vans: diesel, maintenance, insurance, EMI
• Godown: rent, electricity, security
• Phone, internet, software, accountant, bank charges

Example: running costs ₹48,000. Profit after running costs = ₹70,000 − ₹48,000 = ₹22,000.

Step 3: Damage, expiry and write-offs

Goods that broke, expired or were never accounted for are a cost, even when no money left your hand. Value them at what they cost you.

Example: ₹6,000 of damaged and expired stock. Profit now ₹16,000.

See damaged, expired and unsold stock for how to stop this number growing.

Step 4: The cost of credit

Money shops owe you is money you are not using. If you borrow from the bank to pay the company while shops owe you, the interest is a real cost of giving credit. And some of that credit will never be paid.

Example: ₹4,000 interest on the overdraft and ₹3,000 you expect never to collect. Real profit = ₹9,000. On ₹10 lakh of sales.

These numbers are an example, not a benchmark. Your margins depend on your companies and categories. The point is that ₹10 lakh of sales and ₹9,000 of profit can be the same month.

Why profit and cash are different

Profit can be real and still not be in the bank. It hides in two places:

• Shop credit: if shops owe you ₹50,000 more than last month, that much of your profit is in their drawers, not yours.
• Stock: if the godown holds more stock than last month, the cash went into the shelves.

That is why a growing distributor often feels short of cash. See the company wants cash, the shops want credit.

Three habits that protect profit

1. Look at gross profit by product every month. Some products sell well and earn almost nothing.
2. Record every discount and free piece, so you can see what each one costs.
3. Write off damage at cost the day it happens, so it never piles up as a surprise.

How Mulberry Sales helps

Every day closes with profit worked out at what each item cost you, not just what you sold. Damaged stock is written off at what it cost, so it shows up in the day’s profit instead of as a gap at the next stock count (Growth plan and up). P&L analytics take the cost of goods from what each item actually cost when it sold (Business plan), and the cash and bank ledger takes collections in and purchases and expenses out (Business plan). See FMCG distribution software.

Questions people ask