Profit (calculation)

Profit is the financial gain achieved when total revenue exceeds total costs. It's a fundamental concept in business, indicating whether an enterprise is successful and sustainable.

Calculating profit starts with a simple formula:

Profit = Revenue – Expenses

Revenue represents all income generated from selling goods or services. Expenses include costs associated with producing and delivering these products or services, like materials, wages, utilities, rent, and other overheads.

There are two primary types of profit calculations:

• Gross Profit: Calculated by subtracting the cost of goods sold (COGS) from total revenue. It reflects the efficiency of production and inventory management.
• Net Profit: Calculated by deducting all expenses—including operating costs, taxes, interest, and depreciation—from total revenue. Net profit provides a clear picture of overall business profitability.

Profit calculations aren't just about tracking money. Business owners and investors use profit metrics to assess operational effectiveness, identify trends, and plan for continued growth or strategic adjustments.

Understanding and regularly performing profit calculations ensures wise business decisions and supports healthy financial management.