Sometimes the things that we think we understand, actually have a bit more depth to them. Seeing as profit is one of the primary goals of every business, it’s important that we truly understand what it means to make profit, and to be profitable. We did some research to help bring this information to you in a clear and concise way. 

In simple terms, profit is the revenue remaining after ALL expenses are paid. This includes all wages, all software costs, all production cost, rent, cleaning, stationary and uniform costs. Profit is not the amount paid, but rather the number left after all of the businesses costs are deducted. 

Everyone makes a profit, whether they’re on a wage, receiving dividends as shareholders, or working with a large corporation and receiving a mixture of both. 

So what is the opposite of profit? Loss. When the expenses of a business are higher than the profit margin, the business is experiencing a loss. If they stay in this financial situation for too long, they will move into a state of bankruptcy. 

Technically, there are 3 types of profit, including: 

1. Gross profit: Gross profit is when the cost of goods sold is subtracted from total sales. This includes variable costs, but not fixed costs. 
2. Operating profit: this time of calculated profit includes both fixed and variable costs, and is most commonly used in service based businesses that don’t sell products. The acronym for this type of profit is EBITDA which stands for Earnings before Interest, Tax, Depreciation and Amortisation. 
3. Net profit: Net profit considers all costs. It is considered the most accurate representation how much money the business is actually making, and what their financial situation is. 

Businesses will use a profit margin to analyse all these different types of profit. The profit margin is calculated by dividing the revenue by the profit. If this number creates a high ratio, then it means that the business is creating a high number of profit for each revenue dollar. If it creates a low ratio, it means the company is spending more than it is earning, and needs to urgently re-evaluate its expenses.

These ratios help business leaders to not only better understand their own businesses financial situation, but also how they business compares to others in the same industry. Furthermore, small businesses are able to compare their profits to larger corporations. 

So why do businesses want to increase profit? When did profit become the number 1 goal? Profit is the most important thing for most companies because it allows them to continue operating, and it is the driving force behind the capitalist world and the free market economy. The need to make profit, drives different business men and women to think of new ways to deliver services and products, that attract customers and generate income.

To successfully create a profitable business, you need to increase revenue and decrease expenses. You may need to reevaluate your current expenses, and consider what you could cut or at least minimise. You may also need to look at increasing the price of your product or service to increase your revenue! 

All in all, profit is typically the number one objective of a business, and so it is important that we understand it well. If you need more advice or direction in this area, you could consult a professional who can offer you industry expertise and insight.