What is profit?
Profit is essentially what’s left over in revenue once expenses, costs and taxes involved in running a business are taken care of. This profit can then either be reinvested back into the company by its owners or given to themselves as cash.
Publicly owned and traded corporations can pay out a portion of these profits to stockholders as dividends. A business owner can keep the money or reinvest it into the company to encourage growth and more profit.
Why is profit important?
Profit is an essential part of maintaining a healthy business. Without it, businesses cannot continue to function, unless they are backed by a forgiving investor with particularly deep pockets.
Types of profit:
- Pre-tax profit:
As discussed above, pre-tax profit is the profit a business makes after subtracting all the costs that are related to manufacturing and selling its products or services. It can be calculated by subtracting any expenses from the total revenue.
- Operating profit:
Similar to pre-tax profit, but instead focused on presenting the value of a company’s ongoing core business operations minus any interest gained or taxes.
- Net income:
Net income is the money remaining after operating, interest and tax costs are taken care of. Therefore gross profit is important to calculate here. If the value of the net income is negative then it is referred to as a ‘net loss’.