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:
- Gross profit: This is the profit calculated before accounting for operating expenses. It reflects the profitability of the core business operations.
- 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.
- 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.