Profit is defined as the result of total income minus total expenses, so it is the amount of money that a company "makes" during a given accounting period..
The more profit you get, the better the profit, since the profit can be reinvested in the business or retained by the owners. On the other hand, if the profit is negative it is considered as a loss.
Being able to accurately determine the profit or loss of a business is essential to be able to judge its financial health. It can also help you decide how to evaluate goods and services, how to pay employees, etc..
The profit of a company is calculated in three levels in the income statement. It begins with gross profit, until reaching the most complete, net profit. Between these two is the operating profit.
These three levels have their corresponding profit margins, calculated by dividing profit by revenue, and multiplying it by 100.
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To find the profit of the business, you must start by adding all the money earned by the business in a given period of time.
The total sales of goods or services by the company for the period in question are added. This can come from multiple sources, such as products sold, services provided, membership payments, or in the case of government agencies, taxes, fees, etc..
It is easier to understand the process of calculating a company's profit by following this example. Be a small publishing business. In the last month, books worth $ 20,000 were sold to retailers in the area.
The rights to one of the intellectual properties were also sold for $ 7,000 and received $ 3,000 from the retailers, for books as promotional material..
If these represent all sources of income, it can be said that the total income is $ 20,000 + $ 7,000 + $ 3,000, which is equal to $ 30,000.
In general, the total expenses of a company mean the total money that the company spends in the accounting period analyzed.
In the example, let's say the business spent a total of $ 13,000 during the month it earned $ 30,000. In this case, $ 13,000 will be used as the value for the total expense.
After finding the values for the company's total income and expenses, calculating profit is not difficult. The expenses are simply subtracted from the income.
The value obtained for the profit of the business represents the amount of money that has been made, or has been lost, in the specified period of time.
In the example, since we have the income and expenses figures, the expenses are subtracted from the income, giving: $ 30,000- $ 13,000 = $ 17,000 of profit.
If the company generates a negative profit it means that the company spent more money than it earned during the specified period of time.
Instead of saying that a company has obtained a negative profit, it is often said that a company has operated with a net loss.
This is something that should be avoided. However, when a business starts, it is sometimes unavoidable. In the event of a loss, a company may have to pay its operating expenses with a loan or obtain additional capital from investors.
A net loss does not mean that a business is in dire straits, although that may be the case. It is not uncommon for companies to make losses while incurring one-time startup expenses, buying offices, establishing a brand, etc., until they become profitable..
For example, for nine years (1994-2003) the Internet seller Amazon.com lost money before starting to make a profit..
Gross profit is defined as all income left after costs of merchandise sold are accounted for. These costs include only the expenses directly associated with the production of items for sale..
Gross profit = Sales - Cost of merchandise sold.
To understand gross profit it is important to know the distinction between fixed and variable costs.
Variable costs are those that vary according to the quantity of product manufactured and are incurred as a direct consequence of the production of the product. They include materials, direct labor, freight, etc..
On the other hand, fixed costs are generally static in nature. These include: office expenses, office staff salaries, selling expenses, insurance, rent, etc..
Variable expenses are recorded as costs of merchandise sold. On the other hand, fixed expenses are recorded as operating expenses, also called administrative expenses and sales expenses..
The operating profit takes into account all the general, operating, administrative and sales expenses necessary for the operation of the business on a day-to-day basis..
Operating profit = Gross profit - operating, administrative and sales expenses.
This is the bottom line, net income, which reflects the amount of income remaining after accounting for all expenses and income streams..
Debt payments, taxes, one-time expenses, and any income from investments or secondary operations are subtracted from operating profit..
For the fiscal year ended October 2016, Starbucks Corp. posted revenue of $ 21.32 billion. Gross profit and operating profit reach healthy figures of $ 12.8 billion and $ 4.17 billion, respectively.
Net income for the year is $ 2.82 billion. The profit margins for Starbucks would be calculated as:
Gross profit margin = ($ 12.8 billion / $ 21.32 billion) x 100 = 60.07%.
Operating profit margin = ($ 4.17 billion / $ 21.32 billion) x 100 = 19.57%.
Net profit margin = ($ 2.82 billion / $ 21.32 billion) x 100 = 13.22%.
Healthy operating and gross profit margins enabled Starbucks to maintain decent profits while meeting all of its other financial obligations..
Let's look at ABC Clothing's gross profit as an example of gross profit margin calculation..
In year 1, sales were $ 1 million and gross profit was $ 250,000, resulting in a 25% gross profit margin ($ 250,000 / $ 1 million).
In year 2, sales were $ 1.5 million and gross profit was $ 450,000, resulting in a gross profit margin of 30% ($ 450,000 / $ 1.5 million).
It is clear that ABC Clothing made not only more money from gross profit in year 2, but also a higher gross profit margin..
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