Overview
Profit is the amount of financial gain an organization or individual retains after subtracting costs from receipts. In simplest terms it equals revenue minus expenses. Profit is a central indicator of commercial success: it shows whether activities generated more value than they consumed.
How profit is calculated
Calculation depends on which items are included and the accounting basis used. Basic formulas include:
- Gross profit = sales minus cost of goods sold
- Operating profit = gross profit minus operating expenses
- Net profit = total revenue minus all costs, taxes and interest
Accounting profit focuses on recorded (explicit) costs, while economic profit also deducts implicit costs such as opportunity costs. Cash profit differs from accrual profit because of timing of payments and receipts.
Types and characteristics
Common distinctions help users understand performance:
- Gross, operating and net profit reveal where value is created and consumed within a business.
- Profit margin expresses profit as a percentage of revenue and helps compare efficiency across firms and periods.
- Retained profit refers to earnings kept within the firm for reinvestment rather than distributed as dividends.
Uses and importance
Profit fuels investment, pays creditors and shareholders, and funds growth. Lenders and investors evaluate profit trends when deciding whether to provide capital. Governments tax profit, and managers use profit measures to set strategy, prices, and budgets. For small businesses and companies alike, sustained profit is needed for survival.
Historical and conceptual notes
The concept of profit evolved with commerce and accounting practices. Classical economics distinguished normal profit (a return that covers opportunity costs) from supernormal profit (excess returns). Modern discussions also address ethical and social dimensions, such as balancing profit with environmental and social responsibilities.
Key distinctions and practical cautions
Profit should not be confused with revenue (total inflows) or cash flow (actual cash movements). A firm can report profit yet face liquidity problems if cash receipts lag. Analysts therefore examine multiple measures—profit, margins, cash flow and balance sheet items—to form a complete view of financial health. For more technical definitions see resources on costs and accounting.