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What is profit?

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Finance - What is Profit?

Profit is a very important concept for any business – particularly a start-up

Profit is the financial return or reward that entrepreneurs aim to achieve to reflect the risk that they take.

Given that most entrepreneurs invest in order to make a return, the profit earned by a business can be used to measure the success of that investment.

Profit is also an important signal to other providers of finance to a business.  Banks, suppliers and other lenders are more likely to provide finance to a business that can demonstrate that it makes a profit (or is very likely to do so in the near future) and that it can pay debts as they fall due.

Profit is also an important source of finance for a business.  Profits earned which are kept in the business (i.e. not distributed to the owners via dividends or other payments) are known as retained profits

Retained profits are an important source of finance for any business, but especially start-up or small businesses.  The moment a product is sold for more than it cost to produce, then a profit is earned which can be reinvested.

Profit can be measured and calculated.  So here is the formula:

PROFIT = TOTAL SALES less TOTAL COSTS

Here is an example which illustrates the formula in action:

Illustration of calculating profit


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Revision quizzes for business students

Starting a Business

Sources of Finance for a Startup
Franchising
Cash Flow Forecasting for a Startup
Creating & Protecting Business Ideas
Startups and Understanding the Market
Market Research for a Startup
Locating the Startup Business
Choosing a Legal Structure for a Startup
Employing People in a Startup
Generating and Protecting a Business Idea
Using Breakeven in Decision-Making

Finance

Revenues
Breakeven Basics
Costs, Revenues and Profits
Business Costs
Using Budgets
Using Breakeven in Decision-Making
Investment Appraisal Basics
Financial Strategies
Measuring and Improving Profit
Improving Cash Flow
Working Capital
Balance Sheet
Income Statement
Financial Efficiency Ratios
Profitability Ratios and ROCE
Liquidity Ratios
Gearing

Marketing

Competition
Products & Brands
Place (Distribution)
Promotion
Pricing
Price Elasticity of Demand

Business Organisation

Basics of Business Growth
Business Activities
Legal Structure Basics
Franchising
Sole Traders and Partnerships
Limited Companies
Generating and Protecting a Business Idea
Organisational Structures

People

Working in Teams
Communication Basics
Communication Methods
Workforce Planning
Recruitment, Selection & Training
Employee Motivation
Organisational Structures

Operations

Operational Objectives
Critical Path Analysis
Scale and Resource Mix
Lean Production
Capacity Management
Customer Service Basics
Managing Quality
Operational Decision-making
Using Technology in Operations
Working with Suppliers

Economic Environment

Economic Sectors
Government Spending & Taxation
Inflation
Unemployment
Interest Rates & Monetary Policy

Business Strategy

Leadership styles
Business Culture
Change Management







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