What is Profit?
Profit is defined simply as a financial gain – the difference between money earned and money spent. A profit shows that a company is in good health financially. Profits are owned by the business owners, who can choose to distribute the money to shareholders in the form of dividends or reinvest it back into the business to aid in its growth, such as through the purchase of new vehicles or development of new products. There are three types of profit:
Gross profit: Gross profit is the sum of revenue less cost of goods sold (COGS). It assists businesses in determining how much money they have earned after deducting the direct costs associated with their product or service.
Operating profit: The operating profit is the balance of cost of goods sold vs cost of operating expenses. It allows businesses to analyse the influence of direct and indirect costs, such as labour and machinery, on their profits and revenues. To calculate operating profit, subtract operational expenses from gross profit.
Net profit: The net profit is the amount of money that is left over after all expenses, including taxes and interest, have been removed from the total. It helps determine a company's overall health.