Profit

What is profit?

At its most simple definition, profit is the amount of money that’s left over when you take your company’s income and subtract the cost of doing business. If you manufacture a product that costs you $2 to make, and you sell it for $5, you stand to gain a profit of $3 on each unit sold.

In actual practice, profit can be a little trickier to determine, in part because there are multiple types of profit a company uses to consider the strength of its overall financial position.

• Gross profit: refers to the amount of money left over after subtracting the direct costs associated with production. In our example above, $3 is our gross profit after subtracting manufacturing costs.
• Operating profit: refers to the amount of profit left over after subtracting operating expenses from income, but before accounting for any taxes or interest the company will pay on its income.
• Net profit: refers to the amount of profit that remains after subtracting all expenses from the company’s income. This accounts for production costs, operating expenses, interest and taxes. Because it factors in these additional expenses, net profit is often considered the best indicator of a company’s financial health. 

Even though net profit serves as the company’s bottom line, it’s still important to look at all three types of profit since this can provide detailed insight into all areas of your business and help you identify inefficiencies in your operation or production lines.

FAQ

How do you calculate profit for a business?

To measure profit for your business, you can follow this simple calculation: net profit = total revenue minus total expenses. 

What is a profit and loss statement?

A profit and loss statement is a detailed financial statement that can provide important information about your business’s financial health. It provides breakdowns of your revenues, costs, and expenses across a specific period of time—such as a quarter or a year—in order to help you identify areas where you may need to cut costs or find ways to improve efficiency. Gross profit, operating profit, and net profit are all important line items on a profit and loss statement.

What’s the difference between profit and revenue?

Revenue and profit are two different ways to measure the amount of money earned by a business. Revenue is a simple way to describe the total amount of money a business takes in, before subtracting expenses, while profit describes the net income left over after these expenses are subtracted from total revenue.

If profit can be described as a company’s bottom line, then revenue can be called the company’s top line, appearing at the top of the balance sheet.

What is a gross profit margin?

Gross profit margin is simply the gross profit of a business, expressed as a percentage rather than a dollar amount. 

To calculate the gross profit percentage, simply divide your company’s gross profit by its revenue and multiply the result by 100. For example, if your company’s revenue is $100,000 and your gross profit is $60,000, your gross profit margin is 60% ($60,000/$100,000) x 100.

Knowing your gross profit margin is helpful because it gives you an at-a-glance look at how much of your revenue is going toward the cost of doing business versus how much you’re actually making in profit.