Profit is the financial gain obtained after deducting total expenses from the total revenue generated in the business operation. It is an end result of efforts put in to sustain & grow the business organization. Profit gained in the business operation is the owner’s wealth who may or may not decide to reinvest again in the same business for future growth.
The difference between the amount invested & amount spent in a business entity determines profit margin. The Profit margin is the best indicator of the financial health of the business. If the profit margin is good, then we can assume that all the business processes are running in streamline & furthermore firm can re-invest this profit margin in order to grow further.
Percentage Profit = (Total Sales-Total Expenses)/Total Sales.
Suppose a business entity generated $500 Sales in its business operation & total Expenses accrued are $400 to run the business then profit percentage of business is 20%.
- Percentage Profit= ($500 Sales – $400 Expenses) / $500 = 20% .
More the Sales keeping expenses under control more will be the profit.
- It indicates how much percentage of sales have turned into profits. In simple term, the percentage figure indicates how much profit the business has generated for each dollar of sale.
Why Profit is important?
The success of a business organization depends upon its ability to generate profit & maintain its equity to remain competitive. Earning a profit is important because it will determine financial security from the bank & attract investors to fund its operation for future growth. A business owner must understand the importance of generating profit & develop long-term strategies that will give the company the best chance to remain competitive.
- Making profit is very much essential for future growth & expansion of the business.
- Earning more profit allows a business entity to operate in another business location, diversify business model & allow firms to take an extra risk for developing future business plans.
To Borrow money from financial institutions:
- To start business operations, the firm needs finance from financial institutions like banks or other financial institutions.
- Profit is a very crucial factor which will decide whether banks will lend money or not.
Attract investors to invest in the company:
- A firm who is having sustainable & a consistent profit margin usually attract more investors, because investor believes that investing in the profitable firm will pay attractive returns.
- As a business owner, you should always try to gain investor’s confidence by putting an efforts to increase profit margin.
Profit is like a foundation or base of the business entity, more strong the base, stronger will be its empire.