Profit is a common measure of success for a business, used by company executives and business owners to calculate the bottom line. Essentially, profit signal to analysts and investors that a company is earning more than it spends. There are three measures for profit: operating profit, gross profit, and net profit.
Gross profit: subtracting the business’s cost of goods and services (COGS) from revenue to make sure you’re operating a profitable business model.
Equation: Revenue – COGS = Gross Profit
Example: if a chocolate bar cost your business $.70 and you’re able to sell it for $1.25, your gross profit on each chocolate bar is $0.55
$1.25 – $0.70 = $0.55
Operating profit: shows the business is making money after paying COGS, and any interest and expenses.
Equation: Gross profit – Operating Expenses = Operating Profit
Example: let’s say a company has a total revenue of $300,000, COGS of $120,000 and operating expenses of $35,000. Operating revenue will be $145,000.
$300,000-$120,000-$35,000= $145,000
Net profit: accounts for total profits after all expenses, COGS and taxes are paid.
Equation: Operating profit – taxes = net profit
Example: Let’s say a company sold $100,000 worth of goods, which cost them $45,000 to create and they spent an additional $5,000 on operating expenses (eg. Office space, computers, etc) and then $17,000 on tax. Total net profit would be $33,000.
$100,000-$45,000-$5,000-$17,000 = $33,000
In a small business, profits usually go directly to the owner, whereas in publicly owned and traded businesses, a per centage of the profits will be used to pay out stockholders in dividends.
The remaining profits will likely go to the owner(s), be reinvested back into the business, or a combination of the two.
It helps businesses grow and expand: profit can be used to reinvest into the business, whether it be through product improvements, new hires, upgrading equipment, and more. Being a profitable business allows the opportunities for improvement and growth.
It keeps investors engaged: the better the profits, the better the dividends paid to investors. By showing a strong bottom line, investors can rest easy knowing they made the right choice with a business.
Improves stock value: for public companies, quarterly earnings will directly impact the stock market prices. Although, in these reports, profit isn’t the only thing that can influence stock value, as companies can report on other measures and future forecasts.
When cell phones first became popular, no one thought they’d become what they are today. For the first few years, it was …
When Mr. Beauchamp watched a video of Elon Musk – the world’s richest man – recommend a certain investment platform to make …
Your company delivered the good or service it promised to a client and now it’s time to collect the funds owed to …
Eftsure provides continuous control monitoring to protect your eft payments. Our multi-factor verification approach protects your organisation from financial loss due to cybercrime, fraud and error.
