Profit Definition

Profit Definition

What is profit?

Profit describes the financial advantage realized when the income generated by a commercial activity exceeds the expenses, costs and taxes involved in maintaining the activity in question. All profits are returned to business owners, who choose to pocket the money or reinvest it in the business. Profit is calculated as total income minus total expenses.

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profit

What does profit tell you?

Profit is the money a business makes after accounting for all expenses. Whether it’s a lemonade stand or a multinational, publicly traded company, the main goal of any business is to make money. Therefore, the performance of a business is based on profitability, in its different forms.

Some analysts are interested in leading profitability, while others are interested in profitability before taxes and other expenses. Still others are concerned with profitability only after all expenses have been paid.

The three main types of profits are gross profits, operating profits and net profits, all of which appear in the income statement. Each type of profit gives analysts more information about a company’s performance, especially compared to other competitors and time periods.

Gross, operating and net profit

The first level of profitability is gross profit, which corresponds to sales minus the cost of goods sold. Sales are the first line of the income statement and the cost of goods sold (COGS) is usually shown just below. For example, if Company A has $ 100,000 in sales and a COGS of $ 60,000, that means gross profit is $ 40,000, or $ 100,000 minus $ 60,000. Divide gross profit by sales for gross profit margin, which is 40%, or $ 40,000 divided by $ 100,000.

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The second level of profitability is operating profit, which is calculated by deducting operating expenses from gross profit. Gross profit looks at profitability after direct expenses, and operating profit looks at profitability after operating expenses. These are things like selling, general and administrative expenses (selling expenses, administrative expenses and other general expenses). If Company A has operating expenses of $ 20,000, operating profit is $ 40,000 minus $ 20,000, which corresponds to $ 20,000. Divide operating profit by sales for the operating profit margin, which is 20%.

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The third level of profitability is net profit, which is the income that remains after all expenses, including taxes and interest, have been paid. If interest is $ 5,000 and taxes are $ 5,000 more, net profit is calculated by deducting these two items from operating profit. In the example from Company A, the answer is $ 20,000 minus $ 10,000, which equals $ 10,000. Divide the net profit by the sales for the net profit margin, which is 10%.

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Net profit=Operating profitTaxes and interest text {Net Profit} = text {Operating Profit} – text {Taxes & & Interests}

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