"Customers coming in all day, the till full — this shop must be doing really well." Many small shop owners have heard this from a friend, a relative, sometimes even a customer. And many owners feel at the same time that, somehow, at the end of the month there is not as much left as the day's takings would suggest.
The two pictures don't contradict each other. Large sums pass through a small shop, but most of the money only crosses the counter: the goods have to be paid for, the sales tax has to be paid over, and the rent, the wages and the electricity bill have to be settled. What is finally left with the owner is only a small slice of the turnover — and how small a slice varies surprisingly from shop to shop.
This article continues our finance series. How the margin is calculated, and the difference between margin and markup, is explained in What is your margin really? Markup, margin and a shop's true profit; if you are about to open, A business plan for opening a shop: template, worked example and the numbers that sink it will help you put the whole plan together. Here we look at how turnover becomes the owner's income, in neutral units and percentages, with three shop profiles and the owner's own hourly rate.
Turnover and profit: the most common mistake
Turnover is what customers leave on the counter. Profit is what remains of it after every expense. There are several steps between the two, and something goes at every step. Anyone who infers earnings from turnover — whether about their own shop or a shop for sale — almost always overestimates.
- Turnover (gross): the full amount through the till, including the sales tax collected from customers. This is what you see in the till and on the card terminal at the end of the day.
- Net turnover: turnover without the tax. You collect the tax from the customer, but it is not yours — you have to pass it on.
- Gross margin: net turnover minus the cost of the goods sold. This is what the shop pays every other cost from.
- Operating profit: gross margin minus leakage and fixed costs. This is what is left for the owner, before tax.
- Owner's income: the operating profit, from which the owner's own taxes and contributions, loan repayments and money set aside for replacing equipment still have to come.
The most common mistake is to treat gross turnover — or at best the gross margin — as earnings. But the gross margin is not yours yet: it pays the rent, the assistant and the electricity for the fridges. The next section shows with an example how it runs out step by step.
The waterfall: from the till to the owner's pocket
Take a corner grocery in a town, for one month, in neutral units. In the example 115,000 units pass through the till each month, and the assumed average tax content is 15,000 units — real tax rates differ by country and product group, this only shows how the calculation works. From here on, the percentages always relate to net turnover.
| Step | Amount (units/month) | As % of net turnover |
|---|---|---|
| Turnover through the till, including tax | 115,000 | — |
| Sales tax (assumed in the example) | −15,000 | — |
| Net turnover | 100,000 | 100% |
| Cost of the goods sold | −75,000 | 75% |
| Gross margin | 25,000 | 25% |
| Waste | −1,500 | 1.5% |
| Own use | −500 | 0.5% |
| Stock shrinkage (theft, errors, unrecorded goods) | −800 | 0.8% |
| Card fees | −700 | 0.7% |
| Margin after leakage | 21,500 | 21.5% |
| Rent | −4,500 | 4.5% |
| One employee's wage, with contributions | −7,000 | 7% |
| Energy (electricity, heating, refrigeration) | −2,000 | 2% |
| Accountant, insurance, phone, maintenance | −1,500 | 1.5% |
| Left for the owner, before tax | 6,500 | 6.5% |
The most important lesson of the table is not the bottom line but the proportions. Of the 25 units of gross margin, 15 go on fixed costs — in other words, a large part of the shop's turnover is needed just to keep the doors open. Whatever comes on top of that belongs to the owner. That is why a small drop in turnover hits the owner's income disproportionately hard, and a small improvement in margin brings in disproportionately much.
Three shops, three results
The same waterfall looks different in a small village shop, a town corner shop and a shop with its own bakery. The three profiles below are invented, but they follow typical proportions. The figures are monthly amounts, in neutral units, without tax.
| Item | Small village shop | Town corner shop | Shop with its own bakery |
|---|---|---|---|
| Net turnover | 45,000 | 100,000 | 130,000 |
| Blended gross margin | 22% → 9,900 | 25% → 25,000 | 32% → 41,600 |
| Leakage (waste, own use, shrinkage, card fees) | 2% → −900 | 3.5% → −3,500 | 5% → −6,500 |
| Rent | −1,000 | −4,500 | −6,000 |
| Wages with contributions | 0 (family member helps) | −7,000 | −18,000 (baker and assistant) |
| Energy | −1,500 | −2,000 | −4,500 (oven) |
| Other fixed costs | −800 | −1,500 | −2,000 |
| Left for the owner, before tax | 5,700 | 6,500 | 4,600 |
| The same as % of net turnover | 12.7% | 6.5% | 3.5% |
| Owner's working hours per month (approx.) | 300 (70 a week) | 260 (60 a week) | 215 (50 a week) |
| Per owner working hour | approx. 19 units | approx. 25 units | approx. 21 units |
The shop with its own bakery has the best margin, because goods baked on site earn far more than goods bought in for resale. But baking needs a baker, the oven needs electricity, and waste on fresh bakery goods is higher too. If these costs are not under control, the better margin simply drains away. The village shop turns in a decent share even on low turnover, but only because it pays hardly any rent and the family member's work appears nowhere as a cost — if that work had to be paid for tomorrow, the picture would be completely different.
The owner's hourly rate
In most small shops the owner stands behind the counter too — often opening up, closing, placing the orders, and stepping in on their day off when someone is ill. So the most honest question is not how much is left in the shop, but how much that is per hour worked. Divide what is left by your own hours, and you will see whether the shop makes a profit or merely pays for your work.
| Hours per week | Hours per month (approx.) | Per hour from the 6,500 units | Compared |
|---|---|---|---|
| 40 | 173 | approx. 37.6 units | Less than an hour of the employee's time costs (approx. 40) |
| 50 | 217 | approx. 30 units | Three quarters of the employee's hour |
| 60 | 260 | approx. 25 units | About 60% of the employee's hour |
| 70 | 303 | approx. 21.5 units | Roughly half of the employee's hour |
Many owners find this calculation uncomfortable, but it matters. If less per hour is left for you than an employee would cost, the shop is not really making an owner's profit: it pays for your work, more cheaply than for someone else's, and nothing pays for the risk, the money you put in or your weekends. That is not necessarily a reason to close — many owners choose it knowingly for the sake of independence — but it is good to know what you are signing up for.
„A shop is profitable if something is still left after paying the owner a market wage. Whatever is left before that is not profit, it is pay.”
Why is one shop profitable and another not?
Of two shops with similar turnover, one supports its owner decently and the other barely does. The difference is rarely one big thing; much more often it is a few ratios that together decide how much is left.
- Location: the number of passers-by, parking, a nearby school, stop or workplace. A good location is not good because of its rent, but because of how many customers it brings per unit of rent.
- Opening hours and busy hours: if the shop is open at times when hardly anyone comes in, wages and energy keep running while turnover doesn't. Profitable shops fit their opening hours to their peaks.
- Margin mix: fresh bakery goods, coffee, local products and convenience lines typically earn a better margin than tobacco, staples or phone top-ups. The same turnover can produce a very different gross margin.
- Waste: a shop selling fresh goods can easily lose two or three percentage points to waste if it over-orders. That difference alone can decide whether any profit is left.
- Rent relative to turnover: the same rent is bearable in a busy shop and strangles profit in a quiet one. What matters is not the amount of the rent, but what share of net turnover it takes.
How to work it out for your own shop
You can put together your own shop's waterfall in an afternoon if you have the figures for the last three to six months. It is worth not looking at a single month, because the season, big bills and holidays distort it. Work with a monthly average, and always with net amounts, excluding tax.
- 11. Net turnoverTake the turnover through the till and deduct the sales tax. Your accountant can tell you exactly what this was in your shop; if not to hand, it can be worked out from the till closings.
- 22. Cost of the goods soldWhat matters is not how much stock you bought, but how much you sold, at cost price. If stock at the start and end of the month is about the same, the month's purchases are a good approximation; if not, include the difference.
- 33. Gross marginNet turnover minus the cost of the goods sold. Divide it by net turnover and compare it with what you expected from your range — how to calculate it is covered in detail in our article on margin.
- 44. LeakageAdd up the month's waste, own use at cost price, stock shrinkage and card fees. If you don't record waste and own use, this item will only be an estimate — and almost always an underestimate.
- 55. Fixed costsRent, wages with contributions, energy, accountant, insurance, phone, maintenance, and a monthly sum for replacing equipment later. Divide annual items by twelve.
- 66. What is left, and per hourMargin minus leakage minus fixed costs: this is what is left for you, before tax. Divide it by your own monthly working hours and compare it with what an hour of an employee's time would cost.
- 77. The break-even pointDivide the monthly fixed costs by the margin percentage after leakage. In the example, 15,000 units divided by 21.5% is roughly 70,000 units: that is the net turnover needed just for the shop not to make a loss — and the owner's work is not even included yet.
Five levers that grow profit, not turnover
Because fixed costs are largely independent of turnover, anything that raises the margin after leakage goes almost entirely to the owner. In the town corner shop example, a single percentage point of margin is 1,000 units a month — more than 15% on top of the 6,500 units left for the owner. Not a single new customer is needed for that.
- Improve the margin mix: the best shelf space and the area around the counter go to the higher-margin products. If you can see profit as well as turnover by product and by category, you find out what deserves the space.
- Less waste: smaller, more frequent orders of fresh goods, and a timed discount in the hours before they expire. What goes at half price still earns something; what goes in the bin only costs.
- Record own use and shrinkage: whatever is written down by name and item tends to shrink. Not because of distrust, but because it becomes visible.
- Opening hours to fit the busy hours: if the hourly sales show that hardly anyone comes in during a given hour, that hour's wages and energy may cost more than it brings in.
- Renegotiate fixed costs: rent, the energy contract, the terms for card payments, replacing old fridges with more efficient ones. A fixed item saved is yours again every month.
Common mistakes in the calculation
- Treating the money in the till as profit. The day's cash and card takings are turnover — the supplier invoices, the tax and the rent have not even been paid out of them yet.
- Calculating with tax included. If you work out margin from gross turnover, every figure after it will look too good — sales tax is not your shop's income.
- Leaving out your own wage. If the owner's work appears nowhere, the shop can look profitable even when your hourly rate is close to zero.
- Not counting a family member's unpaid work. What is done as a favour today may have to be paid for tomorrow — and that is when it turns out the shop only worked that way.
- Treating purchases as the cost of goods sold. If you built up stock during the month, purchases are higher; if you ran it down, they are lower — either way the profit is distorted.
- Forgetting to replace equipment. A fridge or a till breaks down one day; if you don't put money aside for it every month, one bad month takes a year's profit.
There is one mistake that lies not in the calculation but in how the money feels: when the shop is profitable on paper yet money is always short. The usual cause is cash tied up in stock and supplier payment terms — our article The shop is profitable and still has no money — stock and cash flow covers this in detail.
When not to open or buy a shop
The numbers don't decide for you, but they do warn you. If the waterfall of a shop you plan to open or buy shows any of the following, it is worth stopping and working it through once more — or moving on.
- If the owner's hourly rate in the plan is much lower than what you would earn as an employee, working fewer hours and without the risk.
- If the shop only makes a profit when the family works in it for free, and no one has thought through how long they will keep doing so.
- If the rent would take a much larger share of expected net turnover than it does for similar shops in the area.
- If the plan relies on a blended margin well above that of shops with a similar range — the range will not earn a better margin just because you wrote it into the spreadsheet.
- If the turnover needed to break even is higher than the location can realistically bring in, based on the customer numbers you have observed.
- If the seller quotes turnover, not profit, and cannot back up the steps of the waterfall with paperwork.
- If you have no reserve for at least a few months of fixed costs — the first months are almost always worse than the plan.
Summary
- Turnover is not profit: of the money through the till, after tax, goods, leakage and fixed costs, only a small slice is left for the owner.
- A small grocery's blended gross margin is typically around 20–30%; leakage takes a few percentage points of it, and fixed costs most of the rest.
- Divide what is left for the owner by your own working hours and compare it with what an hour of an employee's time costs — this shows whether there is real profit.
- Profit is decided by location, how well opening hours match busy hours, the margin mix, waste and rent as a share of turnover — not by the size of the turnover.
- A percentage point of margin or a fixed item saved goes almost entirely to the owner — profit can grow without turnover growing.
- The figures vary greatly from shop to shop and market to market: work out your own shop from your own measured data, and have an accountant review it before you decide.
Frequently asked questions
How much does a small shop owner make?
It varies greatly from shop to shop, but in many small groceries only a few per cent of net turnover is left for the owner before tax. In this article's town corner shop example it was 6.5%, more in a small village shop and less in a shop with its own bakery. It is worth working this amount back to the owner's own working hours, because in many shops that reveals that the owner is essentially paying for their own work. You can only work out the exact figure from your own shop's data.
How much profit does a small shop make relative to turnover?
In a small grocery the gross margin is typically around 20–30% of net turnover, depending on the mix of the range. Waste, own use, stock shrinkage and card fees take a few more percentage points of that. After rent, wages, energy and other fixed costs, many shops are left with a single-digit percentage. That is the owner's income before tax, from which their own taxes and contributions still have to come.
Is it worth opening a small shop?
It is worth it if, at the end of the planned waterfall, something is still left after a market wage for the owner's work, and the location can realistically bring in the turnover required. Work out the break-even point, that is, how much net turnover is needed to cover the fixed costs, and compare it with the customer numbers you have observed. Also look at how much you get per working hour, and how that compares with what you would earn as an employee. If the numbers only add up with unpaid family work or a better margin than similar shops achieve, be cautious.
What is a normal margin for a small grocery?
The blended gross margin, calculated across the whole range, is typically around 20–30% of net turnover in a small grocery. Staples, tobacco and phone top-ups often earn much less, while fresh bakery goods, coffee and convenience products earn more. That is why two shops with the same turnover can have very different margins. How to calculate the margin exactly is shown in our article on margin.
What is the difference between turnover and profit?
Turnover is what customers pay; profit is what is left of it after every expense. In between come the sales tax, the cost of the goods sold, waste and the other leakage, and the fixed costs. In a small shop, typically only a small part of turnover becomes profit. Anyone who infers earnings from turnover almost always overestimates.
Why isn't the money in the till profit?
Because the day's cash and card takings are turnover, not profit. Out of them you have to pay the supplier invoices, pay over the sales tax, and settle the rent, the wages and the bills. If you treat the money in the till as profit and take money out of it, you can easily find there is nothing to pay the invoices with when they fall due. Profit only becomes clear after the month-end reckoning.
Should I count my own wage among the shop's costs?
For making decisions, yes, because without it the shop looks more profitable than it is. Work out what an employee working your hours would cost, and deduct that from what is left. If something still remains, that is the shop's real profit; if not, the shop is paying for your work. How your own income should be treated for accounting and tax purposes depends on the form of the business and the country — your accountant can tell you.
How much turnover does a small shop need to be profitable?
You get the break-even point by dividing the monthly fixed costs by the margin percentage after leakage. In this article's example, with 15,000 units of fixed costs and a 21.5% margin, that is roughly 70,000 units of net turnover a month. Below that the shop makes a loss, and the owner's work is not even included. If you also count the owner's wage as a fixed cost, the turnover needed is considerably higher.
How much do waste and theft cost a small shop?
Waste, own use, stock shrinkage and card fees together often take 2–5 percentage points of net turnover, towards the upper end of the range in shops selling fresh goods. That sounds small, but compared with what is left for the owner it is a great deal. In this article's example, the 3.5% of leakage is more than half of what the owner keeps. If you don't record these, you can only estimate them, and the estimate is almost always lower than reality.
How much rent can a small shop afford?
What matters is not the amount but what share of net turnover it takes. In this article's examples rent is around 2–5% of turnover, but this varies greatly from place to place. If the rent on a unit would take a much larger share than for similar shops in the area, only higher turnover or a better margin can make up the difference. Before you sign, work out the break-even point with that rent.
How can I increase profit if turnover isn't growing?
By improving the margin mix, cutting waste, recording own use and shrinkage, fitting opening hours to the busy hours and renegotiating fixed costs. Because fixed costs are largely independent of turnover, almost all of any such improvement goes to the owner. In this article's example, a single percentage point of margin raises what is left for the owner by more than 15%. Change one thing at a time, so you can see what worked.
How do I know which products bring in the profit?
If you record sales product by product and know your cost prices, you can work out profit as well as turnover by product and by category. It often turns out that the best-selling product brings in the least profit, while a less conspicuous category brings in the most. It is also worth comparing two periods, to see whether rearranging a shelf or changing a price had an effect. That is how you decide what gets the best shelf space.
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