What it is:
How it works/Example:
The formula for profit is:
Total Sales - Total Expenses = Profit
Here is some information about Company XYZ for last year:
Using the formula and the information above, we can calculate that Company XYZ's profit was:
$2,000,000 - $1,000,000 - $50,000 - $95,000 = $855,000
Why it Matters:
Profit is one of the most important measurements in determining the health and success of a business. However, the measurement of profit can vary and should be considered with other factors.
For example, profit varies greatly from company to company and from industry to industry. Because companies vary in size, it is often more appropriate to consider profit as a percentage of sales (profit margin) when comparing one company to another. As well, varying accounting methods can greatly influence profit, and these changes may have little to do with a company's actual operations.
Changes in profit are the subject of much analysis. In general, high or rising profits are indicative of a successful business while low profits could suggest a myriad of problems, including inadequacies in customer or expense management.