Profit is the difference between total revenue and total expenses, reported on a company’s income statement. It’s a crucial metric for any business because it signals whether or not your company can sustain itself over time and fuel growth. Profit also provides a cushion for any unforeseen expenses and makes your business more attractive to investors.
To calculate profit, subtract all of your company’s sales revenue from its total costs. This includes direct costs like materials and employee wages as well as indirect costs such as rent and utilities. You can also use this figure to determine your profit margin, which is the percentage of each product’s selling price that you earn as profit.
There are several different types of profit, each providing a different insight into your business’s profitability. Gross profit, for example, is your sales revenue minus the cost of goods sold (COGS). It reflects the profitability of your production operations and is an important metric for manufacturers.
Operating profit, which is calculated as your sales revenue minus all operating expenses, including costs related to research and development, marketing, and payroll, is another important metric for businesses. It reflects the profitability of your core business activities and is often used to compare companies in similar industries.
Net income is your sales revenue minus all taxes, which can be reinvested into the company, distributed to shareholders as dividends, or used to pay off debt. It’s an excellent metric to use when comparing businesses in the same industry because it strips out any impact from differences in tax rates.