Profit is a general term used to denote when earnings exceed the expenses incurred to generate those earnings.
The formula for profit is:
Total revenue – total expenses.
As a result of accrual-based accounting rules, the amount of profit reflected in a company’s income statement usually does not equal the amount of excess cash they accumulated during that same period. Still, a company that is profitable usually has more available cash than an unprofitable company.
The business owners are entitled to any profit the business earns. They decide whether to distribute the profit to themselves or keep the profit in the company to fund growth. Generally, a mature company distributes its profits, usually in the form of dividends. A new company in its growth stage tends to retain profits and use them to expand and grow further.
The challenge for a new company is being able to continue to operate during the initial unprofitable times in order to grow to a point of profitability. The company’s initial investors are the ones who provide enough funds for the company to get through the unprofitable times. These investors do so with the intent of being paid back, hopefully many times over, when the company becomes profitable.
In This Series
InvestingRather than relying solely on net profit figures to evaluate a company's performance, seasoned investors will often look at gross profit and operating profit as well.
InvestingThink of revenue as the top line of a company’s income statement. Profit is the infamous bottom line.
InvestingLearn about profit margin analysis, effective tax rate, return on assets, return on equity and return on capital employed.
InvestingA company’s income statement includes the company’s gross, operating and net profits.
InvestingNet income and profit both deal with positive cash flow, but there are important differences between the two concepts.
InvestingTake a deeper look at a company's profitability with the help of profit margin ratios.
InvestingOperating profit is the profit generated from the core business of a company before accounting for interest and taxes.