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Business profit is the amount remaining after expenses have been subtracted from the income of the business within a specified period of time. The period of time could be stated in monthly, quarterly, or annual terms. Types of profit include gross profit, net profit, and retained profit.
The first type of business profit is called gross profit, which is the excess of revenue from sales less the amount of direct costs — costs to create the products or prepare them for sale. This is referred to as cost of goods sold. These costs could include the materials purchased to manufacture products, transportation of materials into the production facility, direct labor to produce them, and distribution costs. The easiest way to determine cost of goods sold is to start with the value of the beginning inventory, add the amount of purchases during the period in question, and then subtract the value of the ending inventory.
Net profit is the difference between gross profit and operating expenses. Operating expenses differ from direct expenses because they are general business expenses that cannot be directly attributed to the products that are being sold. This is sometimes called overhead expense.
Operating expenses are expenditures that companies make in performing normal business activities. They are divided into two categories: selling expenses and administrative expenses. These include such things as sales commissions, depreciation expense, rent, management or office personnel salaries, repairs, office supplies, business licenses, and taxes. Business profit is usually discussed in terms of net profit since it is from this type of profit that owners receive their income or stockholders receive dividends.
Retained profit is the surplus profit after the amount is withdrawn by the owner or dividends are paid to stockholders. This amount is added to the owner’s equity or net worth of the business. Business profit is important because without it the company might cease to exist. Retained profit is important to the growth of the business and can be used for activities like adding a production line, increasing the size or number of facilities, or research and development of new products.
Owners or managers of companies keep track of business profit by completing a profit and loss statement. This financial statement begins with total or gross sales, less any discounts or returns. Then the cost of goods sold is subtracted to determine gross profit.
Operating expenses are subtracted from gross profit to show income from operations. From this figure, other revenue, such as dividends, interest, or rent income, is added and other expenses, such as interest and taxes, are subtracted to arrive at net profit. After any owner disbursements or stockholder dividends are subtracted, the remaining amount of the business profit will be retained profit.
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If you want to calculate profit, there is a surprisingly simple equation that helps you determine how much money a business earns after all its expenses. The equation itself is basic subtraction — revenue minus expenses — but determining total revenue and total expenses in order to perform this mathematical equation can be a challenge. With this answer, you can then calculate the profit percentage, because that is the number that many businesses use to gauge success.
All you really need to calculate profit is a calculator and some figures. Subtracting the total expenses from the total revenue gives you the gross profit for any business or venture. However, finding these two numbers usually proves to be more work than the actual calculation.
When you calculate profit, know that total revenue is the amount of money a business brings in during a given period of time, usually during a quarter or a year. This refers to the money brought in from the sale of goods and services, but it also can include many other income streams. Many businesses place any savings into a bank account that collects interest, and if this is the case, it must be added to total revenue. Also, many companies that do not explicitly deal with real estate still own property and include any rent paid or sales of property in total revenue. There are many other possible sources of income, and all must be calculated as part of a business’ revenue.
Similarly, a company’s total expenses come from a variety of sources and are even more difficult to calculate than revenue. Expenses traditionally include the standard operating costs of a company, such as salaries, equipment, employee insurance, utilities and rent. This generally is everything for a service-providing business, but a goods-providing business has a massive amount of other expenses to consider. The cost of raw materials, the cost of any machinery or equipment used to create the final product, packaging and shipping all constitute costs that are added into total expenses.
With the total revenue and total expenses, it should be relatively easy to calculate profit by subtracting the expenses from the revenue. After you have the total profit, simply divide it by the total expenses to calculate the percentage of profit. For example, if your business had a total revenue of $110,000 US Dollars (USD) and you subtracted $100,000 USD of expenses, you would have earned $10,000 USD worth of profit. For the percentage, simply divide the profit by the expenses and you have, in this case, a profit percentage of 10 percent.