Profit is all the money your business is left with after you subtract costs and tax. If you’re making a profit, your business is profitable.
Profit is the financial gain that you’re left with when your business’ income exceeds your fixed costs and variable costs. Profit can also be called net profit, net income, or surplus.
How to work out if you’re profitable
Your business can be profitable in its entirety, or you can have specific products or services that are profitable.
To work out whether a product or service is profitable, you need to know the cost price: How much it costs to produce the good or service. Then you can work out whether your income from the sale of that product or service exceeds the cost price.
To work out if your business is profitable overall, you need to know the break-even point, which is the point at which you’re able to sell goods and services above cost price and cover all your fixed costs.
You’ll be able to see the profit on the income statement, which is one of the financial statements you have to include in your annual reports. The income statement shows profit and loss for the past fiscal year.
Why profit matters
Profit is not only a figure on your balance sheet, but a way for you to make strategic business decisions and promote growth, investment, and stability in your business.
This metric serves as an indicator to determine which aspects of a business are most lucrative. If some of your products and services are profitable, but your business isn’t profitable overall, you should figure out why that is. Maybe you need to discontinue products that have a low profitability—or no profitability at all—and concentrate your efforts on the products and services that yield high profits.
While it’s usually a good idea to focus on the most profitable areas of your business, there are other things you should take into account, such as your long-term business goals, your position in the market, as well as customer satisfaction.
Once you’re profitable, you can reinvest the profit in the company. If your company has a lot of money left over, you can also pay dividends to your investors.