Profit is the financial gain obtained by deducting total expenses from revenue generated by the business. It is an end result of efforts put in to sustain & grow the business organization. Profit gained in the business is the owner’s wealth who may or may not decide to re-invest 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 the 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 depends on its ability to generate profit & maintain its equity to remain competitive. Earning a profit is important to determine financial security from the bank & attract investors. 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 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 have 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 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.