What is profit?
We can define profit as “a financial gain, the difference between the amount earned and the amount spent”.
Making a profit is essential for any business. There are several important elements that make up your business story – some more important than others. However, I think it would be safe to say that ‘profit’ is one of, if not, the most important element. Without profit where is your business going? Nowhere. Making a profit enables you to invest in growth. But, it also allows you to be resilient as a business when unforeseen circumstances occur.
Profit can also act as a motivating factor or incentive. Finally, it can be a source of finance for your day-to-day operations within your business.
When all is said and done understanding profit and how to calculate it is what you want and what you need to keep on top of your business story.
How to calculate it
The standard equation is:
PROFIT = TOTAL SALES – TOTAL COSTS
Once your total sales exceed that of the total cost then you are in profit.
Firstly, you have to consider the various choices on your hands. You may decide to withdraw the profit made from the business (this is released as what we call ‘dividends’), and you may use that however you see fit.
Secondly, you could opt to retain the profit within the business. In this case, you would either express this as cash usage or invest the profits into new assets. You might decide to streamline your processes and buy management accounting software. Or you could invest in other technology to aid your efforts or perhaps invest in general stock. The possibilities are endless.
NB: If you have business expenses then these need to be taken into account as they will affect your total.
Business growth for higher profitability
From infancy to maturity in your business, you should clearly define and maintain your growth focus. Successfully growing your business will mean higher profitability. Understanding your financials, understanding the numbers (overheads, margins, cash flow, and profit!) gives you the edge in your business story, helping you make intelligent projections that should ultimately grow your business.
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