What is profit?

There are several important elements that make up your business story, some more important than, some less 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.

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.

Profit can be defined as “a financial gain, the difference between the amount earned and the amount spent”. It can also be used as a measure of a business success or investment. It 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.

How to calculate it

It can be calculated as: “TOTAL SALES *minus* 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’, more on those later!), and you may use that however you see fit.

Secondly, you could opt to retain within the business and express this as cash usage or investing the profits into new assets. You might decide to streamline your processes and buy Management Accounting software. Or you invest in other technology to aid your efforts or perhaps invest in general stock; the possibilities are endless.

Tip: It is worthwhile noting that if you have business expenses then these need to be taken into account as they will affect your total.

Growth focus means growing your returns

From infancy to maturity in your business, your growth focus should be clearly defined and maintained. Successfully growing your business will mean higher profitability. Understanding your financials, understanding the numbers (overheads, margins, cashflow, profit!) gives you the edge in your business story, helping you make intelligent projections that should ultimately grow your business.

Get in touch with us to see how we can help you increase your profitability and all your accounting and tax needs. For more business and finance , news, advice and tips, don’t forget to watch our weekly broadcasts, listen to our weekly podcast I Hate Numbers.

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