Profit is the financial benefit realized when revenue generated by business activities exceeds all costs, expenses and taxes involved in sustaining those activities. Any profits earned can funnel back to the business owner, who may choose to pocket it, distribute it as dividends or reinvest it back into the company, fueling growth and potentially increasing stock value in the process. Profit is a critical metric for all businesses, and it’s important to track both revenue and profit for a full picture of business health. High revenue can indicate strong demand, but it won’t necessarily guarantee profitability if expenses are too high. Conversely, low or nonexistent profit may be indicative of poor management or marketing strategies that haven’t paid off.
To calculate profit, subtract total revenues from all costs and expenses for a given time period. Revenues include any income a company earns from selling products or services, while expenses refer to all overhead costs related to running the business, including salaries, utilities, rent, phone service and more. There are three main types of profit, ranging from gross profit to operating profit and finally net profit.
Each of these provides unique insights into the performance of a business. Gross profit margin is a good indicator of how efficiently a company is producing its goods or delivering its services, while operating profit margin illuminates the performance of core operations before interest and taxes are taken into account. Net profit, which includes both recurring and one-time expenses as well as estimated or actual taxes, is the final measure of a business’s financial health.