What Is Profit?
For businesses, profit is the positive financial gain remaining after all costs, taxes, and expenses have been deducted from total sales. A business owner will either apportion profits or reinvest them back into their company.
Profit is one of the most important measurements in determining the health and success of a business.
Profit may also be referred to as the bottom line.
Different Types of Profit
All three main types of profit can be found on a company’s income statement:
To calculate profit, use the following formula:
Example of Profit
Here is some information about Company XYZ for last year:
Using the profit formula and the information above, we can calculate that Company XYZ's profit was:
$2,000,000 - $1,000,000 - $50,000 - $95,000 = $855,000
Drawbacks of Calculating Profit
Because profit varies considerably between companies of different sizes (and between industries), it is often appropriate to consider profit as a percentage of sales (profit margin) when making comparisons.
Is It Better to Have a High or Low Profit?
Changes in profit are the subject of much analysis. Generally speaking, high and/or rising profits are indicative of a successful business while low and/or declining profits could suggest a myriad of problems (e.g. expense management issues)