Profit

Page written by AI. Reviewed internally on July 16, 2024.

Definition

Profit, in a business context, is the financial gain or positive difference between total revenue and total expenses over a specific period of time.

What is profit?

Profit is a fundamental measure of a business’s financial performance and is a key indicator of its viability and success.

Formula for calculating profit:

Profit = total revenue – total expenses

Types of profit:

  1. Gross profit: This is the profit calculated before accounting for operating expenses. It reflects the profitability of the core business operations.
  2. Operating profit (operating income): This is the profit derived after accounting for operating expenses. It provides an indication of the profitability of the company’s core operations.
  3. Net profit (net income): This is the final profit figure after all expenses, including taxes and interest, have been subtracted from total revenue. It represents the overall profitability of the business.

Profitability is a primary measure of a business’s success. It indicates whether a company is generating sufficient income to cover costs and generate a return on investment. Profit allows a business to provide returns to its shareholders through dividends, reinvestment, or share buybacks and will attract investors and lenders 

Example of profit

A bakery sells cupcakes for $3 each. The cost to make each cupcake, including ingredients and labor, is $1. After selling 100 cupcakes, the bakery’s total revenue is $300 ($3 x 100) and the total cost to make the cupcakes is $100 ($1 x 100).

Therefore, the bakery’s profit is $200.

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