To make your business successful, you need to earn more profit. The bottom line (net profit) of the income statement of your company is going to indicate how well your business is performing. It plays a key role in the growth and development of a business. So in this post, we’ll learn: what is profit, what are the three main types of profit and how you can increase them. Let’s start!
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Understanding Profit
Profit is the remaining amount you get after paying all the costs and expenses. These costs can be material, taxes, interest labour, etc. It is the result of operating a business, as it is the prime purpose of running a company. It is considered capital that can be used for multiple tasks to improve the efficiency of the business. In a nutshell, a good profit shows that a business is flourishing.
Types of Profit
As per the income statement, there are three main types of profit:
1- Gross Profit
Gross profit is calculated by subtracting the cost of sales from the revenue or COGS. It is shown in the income statement and indicates how much a business has earned against the direct cost associated with the manufacturing of products or services. You can work out gross profit by subtracting COGS from the total sales. Here is the formula:
Gross Profit= Revenue – Cost of Sales
2- Operating Profit
This profit is shown below the gross profit in the income statement. It takes into consideration both cost of goods sold (COGS) and operating expenses. It includes both variables and fixed costs. This profit helps companies to assess how direct costs ( like machinery, labour )and indirect costs ( rent, utilities) reduce the profit. You can calculate operating profit by deducting operating costs from gross profit. Here is the formula to calculate OP:
Operating Profit = Gross Profit – Operating Expenses – Depreciation – Amortization
3- Net Profit
Net profit is the main type of profit that a business needs to consider. It shows an accurate picture that how much money a business is making and how healthy a business is by getting revenue after paying all the costs and expenses. It is a final calculation on the income statement (bottom line).
This profit is the final amount left after deducting every business expense, along with interest and taxes. You can calculate this profit by subtracting taxes and interests from the operating profit. Here are the two formulas to get net profit:
Net profit = total revenue – total expenses.
Net profit = Operating profit – Taxes and Interests
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Ways to Increase Profits
There are multiple ways to increase the profit of your business. These are:
- Identify areas in your business that can be improved
- Increase your revenue by selling more, getting new customers and increasing the price
- Use KPIs (Key performance indicators) to discover your weak areas and make them better
- Find ways to reduce your expenses by deducting direct and indirect costs
- Negotiate better deals with your suppliers
- Remove products and services that don’t sell well
- Use your inventory as soon as you can
- Expand your business by getting new opportunities
- Streamline the business processes where required
Quick Sum Up
Hopefully, after giving this post a read, you have got a better understanding of what is profit, what are the types of profits and how to increase it. Though profit is a great indicator to see the health of your business and gauge the future of a business. There are a lot of ways to improve the profitability of your business. In this regard, you should consult a business expert to increase your gross profit.
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Disclaimer: This blog provides general information on the types of profit.