Profit is the financial gain that your business makes when revenue exceeds costs, expenses, and taxes. It’s an important metric that can indicate your company’s health, growth potential, and ability to sustain operations over time. It also helps attract investors since profitable companies can pay dividends to shareholders.
While many companies strive to increase their revenue, increasing profits is equally important for long-term success. A balance between the two metrics is critical for maximizing profitability, which may include strategies such as expanding product lines or services to appeal to new customers, reducing operating costs by increasing efficiency and implementing technology, or adjusting pricing strategies to maximize margins.
There are a number of important profit measurements that you should regularly track to assess your company’s performance. These measurements vary in their nuances and insights, but all provide a snapshot of your company’s financial health.
Gross profit is calculated as revenue minus the cost of goods sold (COGS), which includes direct material and labor costs associated with producing your products or services. This measure highlights your business’s efficiency in producing and delivering your goods or services, as well as the effectiveness of your pricing strategies.
Operating profit is calculated by subtracting all operating expenses from gross profit, which includes things like rent, utilities, payroll, marketing, and more. It provides insight into your core business operations, and is a great indicator of how efficiently your company manages its resources over a given period.