Profit

Published Jan 17, 2023

Definition of Profit

Profit is defined as the difference between total revenue and total costs. That means it is the amount of money a company earns after subtracting all its expenses. In other words, it is the reward for taking on the risk of running a business.

Note that different types of profit exist, depending on the types of costs included. Accounting profit includes all explicit costs, whereas economic profit also considers implicit costs. In most cases, when people talk about profit, they refer to accounting profit.

Example

To illustrate this, let’s look at a small bakery. Assume that the bakery sells 20 cakes for USD 10.00 each. This results in total revenue of USD 200.00. Meanwhile, it also has to pay for ingredients, rent, utilities, and other expenses, which amount to USD 140. That means total costs are USD 140. Thus, the bakery’s (accounting) profit adds up to USD 60 (i.e., 200 – 140).

Why Profit Matters

Profit is an important indicator of a company’s financial health. It is the reward for taking on the risk of running a business and is the ultimate goal of any business. Thus, it is important for companies to maximize their profits in order to stay competitive and ensure their long-term survival.

Furthermore, profits are also important for investors, as they provide returns as well as an indication of the company’s performance and potential for future growth.