Three Types of Profit

If you’re just starting a new business, you need to make sure you understand how to read your income statement. One of the main things you will be checking as your business grows is your profit. There are three different indicators for profit, and this blog will explain what each one means.

1. Gross Profit. Gross profit is calculated by taking your revenue and subtracting your direct costs. Direct costs are usually referred to as “cost of goods sold” and include all expenses, such as labor or materials, that are directly involved with making your product or providing your service.

2. Operating Profit. Operating profit is calculated by taking your revenue and subtracting your direct costs and “overhead” costs. These “overhead” costs include all the other expenses necessary for your business to operate, such as marketing expenses or rent for your building. These costs do not result directly from the production of your goods, but they are necessary for your operations.

3. Net Income. Net income is calculated by taking all the money your company receives and subtracting all the money that goes out. This calculation goes beyond just revenue and expenses. It includes any gain or loss of money from activities that are not related to sales or operations. This may include selling assets or investing in areas outside the company.

Profit is also commonly converted to a percentage called a margin. The profit margin is calculated by dividing profit by revenue. This percentage compared to the rest of your industry will help you understand how your company is performing. Being able to read your income statement and understand how to track your profit is crucial for the growth and success of your business.

If you are a small business owner and have questions about your income or finances, call today. AMJ helps businesses in the community prepare their taxes, manage their finances, and plan for the future!

SOURCE

https://smallbusiness.chron.com/three-levels-profit-income-statement-53362.html