For any entrepreneur in Nigeria, especially those running small operations (e.g., ₦500K–₦3M in annual sales), understanding basic financial metrics is important. These metrics don’t just tell you if you’re making sales; they tell you if you’re truly profitable.

The essentials are: Revenue, Cost of Sales, Gross Profit, Profit Before Tax (PBT), and Net Profit. Together, they tell the story from your top-line sales down to your actual earnings. This article explains each term and shows how they fit together.

Revenue

Revenue is the total income your business generates from sales. Often called ‘sales’ or ‘turnover,’ this is the ‘top line’ on your profit and loss statement. It’s the full amount you earn before any costs are subtracted. As financial experts at Investopedia explain, revenue is the income generated from normal business operations.

Example: If a small shop sells 200 items at ₦2,500 each, its total revenue is ₦500,000. This includes all sales, whether paid in cash or on credit.

Cost of Sales (or COGS)

This is the direct cost of producing or purchasing what you sell. It’s also widely known as Cost of Goods Sold (COGS).

This includes materials, supplies, and direct labor. It’s important to separate this from your indirect costs. For example:

For a retailer: The cost is what you paid the wholesaler to buy the 200 items you sold.

For a baker: The cost includes the flour, sugar, and eggs, plus the wages of the baker who physically made the bread. It does not include your admin staff’s salaries or the cost of your marketing.

Example: If that shop spent ₦300,000 buying the 200 items it later sold, its Cost of Sales is ₦300,000.

Gross Profit

This is what remains after you cover the direct costs of your sales. It shows how much money is left from sales before paying any overhead or operating expenses.

Why it matters: This number tells you how well you are pricing your products and controlling your production costs. A low Gross Profit means your sales are not earning enough to cover even the basic costs of your products.

Example: Using our example, Gross Profit = ₦500,000 (Revenue) – ₦300,000 (Cost of Sales) = ₦200,000.

Profit Before Tax (PBT)

After you find your Gross Profit, you must subtract all your other business costs (also called operating expenses or ‘overheads’). These are the indirect costs not tied to a single sale.

These expenses include:

• Rent
• Admin salaries (your manager, accountant, etc.)
• Utilities (power, internet)
• Marketing and advertising
• Interest on business loans

What’s left before you pay company income tax is your Profit Before Tax (PBT). It’s also known as Earnings Before Tax (EBT).

Example: If your Gross Profit is ₦200,000 and your total operating expenses for the month are ₦150,000, your PBT is ₦50,000.

Net Profit

This is your actual earnings. It’s the final amount of money your business has left after every single expense has been deducted, including taxes.

As the business experts at Sage explain, Net Profit (or Net Income) shows if your business truly made money. This is the “bottom line” that every owner needs to know.

If this number is positive, you are profitable. If it’s negative, your business is running at a loss.

Example: If your PBT is ₦50,000 and you pay ₦15,000 in taxes, your Net Profit is ₦35,000.

How it all fits together

Each term builds on the previous one. Here is the simple flow using our example:

Revenue (₦500,000)

Minus: Cost of Sales (₦300,000)

= Gross Profit (₦200,000)

Gross Profit (₦200,000)

Minus: Operating Expenses (Rent, Salaries, etc.) (₦150,000)

= Profit Before Tax (₦50,000)

Profit Before Tax (₦50,000)

Minus: Taxes (₦15,000)

= Net Profit (₦35,000)

The one metric to watch

Knowing your Net Profit is great, but understanding its percentage is even better. This is your Net Profit Margin.

It shows you how much profit your business keeps from each Naira of sales. A higher margin is better. As a small-business resource from the University of Rhode Island notes, this margin shows if your business is truly making money after all expenses.

Use this simple formula:

Net Profit Margin = (Net Profit / Revenue) x 100%

In our example: (₦35,000 / ₦500,000) x 100% = 7%.

This means that for every ₦100 you make in sales, you keep ₦7 as pure profit. Tracking this margin monthly tells you if your business is becoming more or less efficient.

Know your numbers, know your business

As a small business owner, you don’t need to be an accountant, but you do need to grasp these five terms. They are the backbone of your income statement and reveal your company’s true financial health.

By tracking Revenue, Cost of Sales, Gross Profit, PBT, and Net Profit, you can see exactly where your money goes and, most importantly, confirm if you are truly earning a profit or just running at a loss.

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