Definition
Profit, in a financial context, refers to the monetary surplus left once all business expenses, taxes, and costs of goods sold have been subtracted from the total revenue. It signifies the financial gain achieved from conducting business activity and represents the value that the business has generated beyond its consumption of resources. Put simply, profit is the income remaining when the costs of a business’s goods or services are subtracted from the revenue gained selling those goods or services.
Phonetic
The phonetics of the keyword “Profit” is /ˈprɒfɪt/.
Key Takeaways
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- Profit is the financial benefit realized when revenue from a business is higher than the costs and expenses needed to operate that business.
- It serves as a key indicator of the success and health of a business. High profits often mean the business is doing well while low or consistent losses may indicate problems.
- Profit can be used in various ways: it can be retained in the business as retained earnings, or it can be distributed to shareholders and owners in the form of dividends or withdrawals.
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Importance
Profit is a pivotal term in business and finance as it indicates the financial gain obtained when revenue generated from a business activity exceeds the costs, expenses, and taxes needed to sustain the activity. It is fundamentally the primary goal of any commercial venture and serves as primary indicators of business success and sustainability. It signals the financial health of a business, showcases its growth potential, and influences strategic decision making such as determination of salaries, dividends to shareholders, reinvestment into the business or new ventures. In addition, it affects the attraction of potential investors and overall market valuation of a business. Therefore, profit is not only important for business survival, but also for continued growth and development.
Explanation
In the financial and business sphere, profit is paramount to the survival of a company. The purpose of profit is not just to denote a successful fiscal period post covering expenses, but it’s an imperative indicator of growth and sustainability. It provides a quantifiable rate of return that factors into investment decisions, market value of a company, and also affects aspects such as hiring and expansion. Without profit, a company could face stagnation, diminishing market confidence, and even insolvency in drastic situations. Therefore, profit is regarded as a key motivation and goal for entrepreneurs, investors and shareholders alike.Profit is also used as a reinvesting tool to further bolster the company’s standing. A part of the profit can be invested back into the company to develop new products, improve existing services, increase marketing efforts, or expand into new markets. This reinvestment strategy is designed to achieve even higher profits in the future. In addition, part of the profit is often distributed among shareholders as dividends, which provide an incentive for more people to invest in the company. This efficient allocation of profit thus serves as a catalyst for growth and advancement in the company’s journey.
Examples
1. **Apple Inc.**: One of the globally recognized examples set by Apple Inc. They design, manufacture and market smartphones, personal computers, tablets, wearables and accessories. In Q1 2021 Apple’s net income (profit) was approximately USD $28.76 billion, which was achieved by high sales volume and a successful business strategy.2. **McDonald’s**: This global fast-food chain is an example of profit in the business/finance world. In 2019 McDonald’s made a profit of about $6 billion. The profit is earned from their food sales minus their overhead expenses like employee salaries, restaurant maintenance, and marketing costs.3. **Nike Inc.**: A very prominent name in the sports accessories and apparels, Nike, is also an excellent example when it comes to the matter of profit. For the fiscal year 2020, Nike reported a profit of USD $2.54 billion. This profit was derived after deducting production costs, employee wages, advertising costs, taxes and other operating expenses from their total revenue.
Frequently Asked Questions(FAQ)
What does Profit mean in business finance?
Profit refers to the financial gain that a business experiences when the amount of revenue generated from its activities exceeds the costs, expenses, and taxes needed to sustain those activities.
How is profit calculated?
Profit is typically calculated by subtracting all the business costs, including operational expenses, cost of goods sold, taxes, etc., from the total revenue.
What is the importance of profit in business?
Profits are crucial as they can be reinvested back into the business for expansion, or they can be distributed to shareholders as dividends. They are also a key indicator of a company’s financial health and stability.
What is the difference between gross profit and net profit?
Gross profit is the profit a company makes after deducting the costs associated with making and selling its products or providing its services. Net profit is the actual profit after all the operating expenses, interest, and taxes have been deducted from the gross profit.
What is meant by Profit Margin?
Profit margin expresses the profitability of a company in terms of percentage. It is calculated by dividing the profit (net or gross) by the revenue, and then multiplying by 100.
How can a business increase its profit?
Businesses can increase profits by enhancing revenues, reducing costs, improving efficiency, or any combination of these. This can involve anything from increasing product pricing or sales volumes to decreasing overhead costs.
What is operating profit?
Operating profit is the profit from a firm’s core business operations, excluding deductions of interest and taxes. It’s also known as earnings before interest and taxes (EBIT).
Is revenue the same as profit?
No, revenue, often called sales, is the total amount of money a business generates from its activities. Profit, however, is the amount left over from that revenue once costs and expenses have been subtracted.
What happens if a business operates at a loss?
When a business operates at a loss, it means that its expenses exceed its revenues. Sustained loss could lead to a failure of the business, unless it can secure new funding or significantly reduce costs.
How should a business use its profit optimally?
Depending on business goals, profits can be reinvested back into the business, saved for future uncertainties, used for paying off debts, distributed among the employees as bonuses, or paid out to shareholders as dividends.
Related Finance Terms
- Revenue
- Net Income
- Gross Margin
- Operating Expenses
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
Sources for More Information
