Profit

Financial Dictionary -> Investing -> Profit

Profit is usually used in reference to a business and not the individual. If Revenue is all the cash coming in, then profit is what is left over after business costs have been covered with revenue. Profit is and should be the prime motive for business activity because if a business isn't profitable then nobody is going to get paid. The key formula for calculating profit is simply:

Profit = Total Revenue - Total Costs.

Although profit is always revenue minus costs, there are different types of cost which can be allowed for. This leads to different types of profit.

Gross Profit:
The revenue earned by a firm less the cost of achieving the sales. These costs are essentially direct costs such as wages and raw materials. Gross Profit = Sales Revenue - Cost of Sales.

Operating Profit:
This is the businesses gross profit minus the overheads associated with production. For example rent and rates.

Pre Tax Profits:
The business's operating profit plus one off items such as the costs of staff restructuring and redundancy payments.

Profit after Tax:
This is simply how much is left after the business has paid tax.

Retained Profit:
Retained profit is profit that has been re-invested back in to the business to help it run or expand. Other profit may be given to shareholders as dividends or as bonuses to employees.

Undeniably, profits are important to all of businesses and are usually assessed in relation to some measure, for example the capital originally invested or sales revenue. Profit is important because it provides a measure of the success of a business; it provides funds for investment and expansion and makes the company attractive to investors.

Profit management can be a major part of large businesses as blowing all the money made on things that don't benefit the business may as well be money down the drain.