💰 What is Profit?
Definition: Profit is the financial surplus left after all costs have been deducted from revenue. It is the reward for taking the risk of running a business.
Profit is the main objective for most businesses. A business that consistently fails to make profit will eventually run out of money and close.
Profit = Revenue − Costs. Simple concept, but the details matter — WHICH costs you deduct gives you DIFFERENT types of profit! 🧮
📦 Gross Profit
Formula: Gross profit = Sales revenue − Cost of goods sold (COGS)
Gross profit shows how much money is left after paying for the direct costs of making or buying the products sold. It does NOT include overheads like rent or marketing.
Example: A bookshop has sales revenue of $50,000. It paid $30,000 for the books it sold (COGS). Gross profit = $50,000 − $30,000 = $20,000
Cost of goods sold (COGS) includes ONLY the direct costs of the products sold — raw materials, purchase cost of stock, direct labour. NOT rent, NOT marketing!
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📊 Net Profit (Profit for the Year)
Formula: Net profit = Gross profit − Expenses (overheads)
Net profit (also called profit for the year) is what remains after deducting ALL operating expenses from gross profit. This includes rent, wages, utilities, marketing, depreciation and other overheads.
Example: Gross profit = $20,000. Expenses: rent $5,000, wages $8,000, marketing $2,000 = $15,000 total. Net profit = $20,000 − $15,000 = $5,000
Gross profit tells you about TRADING performance. Net profit tells you about OVERALL business performance after ALL costs. Net profit is the ''bottom line'' 📉
💵 Profit vs Cash
One of the most important distinctions in business finance — profit and cash are NOT the same thing.
- Profit is calculated over a period (usually a year) and includes non-cash items like depreciation
- Cash is the actual money in the bank RIGHT NOW
- A business can be profitable but have no cash (e.g. customers haven''t paid yet)
- A business can have cash but not be profitable (e.g. just received a large loan)
Exam favourite: ''Explain why a profitable business might face cash flow problems.'' Answer: credit sales, large stock purchases, loan repayments, timing differences between income and expenditure.