7 Types of Profit Every Business Owner Should Know
Profit is the amount of money that a business earns after deducting all its expenses. It is a key indicator of the financial health and performance of a business. However, not all profits are equal. There are different types of profit that measure different aspects of a business’s profitability. In this article, we will explain what are the 7 types of profit every business owner should know and how to calculate them.
1. Gross Profit
Gross profit is the difference between the revenue and the cost of goods sold (COGS). It shows how much money a business makes from selling its products or services before accounting for any other expenses. Gross profit can be expressed as a dollar amount or as a percentage of revenue, which is called gross profit margin. The formula for gross profit is:
Gross Profit = Revenue – COGS
For example, if a business sells $10,000 worth of products and its COGS is $6,000, its gross profit is $4,000 and its gross profit margin is 40%.
2. Operating Profit
Operating profit is the difference between the gross profit and the operating expenses (OPEX). It shows how much money a business makes from its core operations after deducting the costs of running the business, such as rent, utilities, salaries, marketing, etc. Operating profit can also be expressed as a dollar amount or as a percentage of revenue, which is called operating profit margin. The formula for operating profit is:
Operating Profit = Gross Profit – OPEX
For example, if a business has a gross profit of $4,000 and its OPEX is $2,000, its operating profit is $2,000 and its operating profit margin is 20%.
3. Net Profit
Net profit is the difference between the operating profit and any other income or expenses that are not related to the core operations of the business, such as interest, taxes, depreciation, amortization, etc. It shows how much money a business makes after accounting for all its income and expenses. Net profit can also be expressed as a dollar amount or as a percentage of revenue, which is called net profit margin. The formula for net profit is:
Net Profit = Operating Profit – (Interest + Taxes + Depreciation + Amortization)
For example, if a business has an operating profit of $2,000 and its interest expense is $200, its tax expense is $400, its depreciation expense is $100 and its amortization expense is $100, its net profit is $1,200 and its net profit margin is 12%.
4. EBIT
EBIT stands for earnings before interest and taxes. It is another way of measuring the operating profit of a business without considering the effects of interest and taxes. EBIT can be useful for comparing the profitability of different businesses that have different capital structures (debt vs equity) or tax rates. EBIT can also be used to calculate other types of profit, such as EBITDA and EBITA. The formula for EBIT is:
EBIT = Operating Profit + Interest
For example, if a business has an operating profit of $2,000 and its interest expense is $200, its EBIT is $2,200.
5. EBITDA
EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is another way of measuring the operating profit of a business without considering the effects of interest, taxes and non-cash expenses such as depreciation and amortization. EBITDA can be useful for comparing the profitability of different businesses that have different levels of fixed assets or intangible assets that affect their depreciation and amortization expenses. EBITDA can also be used to estimate the cash flow of a business. The formula for EBITDA is:
EBITDA = EBIT + Depreciation + Amortization
For example, if a business has an EBIT of $2,200 and its depreciation expense is $100 and its amortization expense is $100, its EBITDA is $2,400.
6. EBITA
EBITA stands for earnings before interest, taxes and amortization. It is another way of measuring the operating profit of a business without considering the effects of interest, taxes and amortization expenses. EBITA can be useful for comparing the profitability of different businesses that have different levels of intangible assets that affect their amortization expenses. EBITA can also be used to estimate the value of a business based on its earnings potential. The formula for EBITA is:
EBITA = EBIT + Amortization
For example, if a business has an EBIT of $2,200 and its amortization expense is $100, its EBITA is $2,300.
7. Cash Flow
Cash flow is not exactly a type of profit, but it is closely related to it. Cash flow is the amount of money that a business generates or spends in a given period of time. It shows how much money a business has available to pay its bills, invest in its growth, or distribute to its owners. Cash flow can be divided into three categories: operating cash flow, investing cash flow and financing cash flow. The formula for cash flow is:
Cash Flow = Cash Inflow – Cash Outflow
For example, if a business receives $10,000 from selling its products and services, pays $6,000 for its COGS, $2,000 for its OPEX, $200 for its interest, $400 for its taxes, $100 for its depreciation, $100 for its amortization, and invests $500 in new equipment, its cash flow is:
Cash Flow = ($10,000 – $6,000 – $2,000 – $200 – $400) + ($100 + $100) – $500
Cash Flow = $1,900
As you can see, the cash flow of a business can be different from its net profit due to the timing and nature of the cash inflows and outflows.
Knowing the different types of profit can help you understand the financial performance and health of your business. By calculating and analyzing the various profit margins, you can identify the strengths and weaknesses of your business and make informed decisions to improve your profitability. You can also use the different types of profit to compare your business with other businesses in your industry or market and benchmark your performance.
Types of Profit
Profit is the difference between the revenue and the cost of producing a good or service. There are different types of profit that measure how well a business is performing. In this blog post, we will discuss two types of profit: gross profit and net profit.
Gross Profit
Gross profit is the revenue minus the cost of goods sold (COGS). COGS are the direct costs of producing the goods or services, such as materials, labor, and overhead. Gross profit shows how efficiently a business uses its resources to produce its products or services. A higher gross profit means that the business has a lower COGS relative to its revenue, which indicates a higher quality or a lower production cost.
Net Profit
Net profit is the revenue minus all the expenses, including COGS, taxes, interest, depreciation, and other costs. Net profit shows how much money a business has left after paying all its obligations. A higher net profit means that the business has a higher income relative to its expenses, which indicates a higher profitability or a lower operating cost.
Global Demand in This Industry
The global demand for goods and services depends on various factors, such as consumer preferences, income levels, population growth, technological innovation, and market competition. The demand for different types of goods and services may increase or decrease over time, depending on these factors. For example, the demand for online services may increase due to the COVID-19 pandemic, while the demand for travel services may decrease.
The global demand for goods and services affects the profitability of businesses in this industry. A higher demand means that businesses can sell more products or services at higher prices, which increases their revenue and profit. A lower demand means that businesses have to sell fewer products or services at lower prices, which decreases their revenue and profit.
References:
https://books.google.com/books?id=9Pascy_5HUMC
https://books.google.com/books?id=VbrKgDK-rioC
https://www.investopedia.com/terms/p/profit.asp
https://www.forbes.com/sites/forbesfinancecouncil/2018/06/25/how-to-calculate-gross-profit/
https://www.thebalance.com/how-to-calculate-net-profit-margin-357577
https://www.worldbank.org/en/publication/global-economic-prospects
https://www.statista.com/markets/
https://www.investopedia.com/terms/p/profit.asp
https://www.accountingcoach.com/blog/what-are-the-different-types-of-profit
https://www.thebalancesmb.com/types-of-profit-margins-393478
