Profit is the financial benefit realized when revenue from a business activity exceeds the costs involved in sustaining that business activity. Profit is measured at various levels within an income statement — gross profit, operating profit, and net profit (also called “the bottom line”). Each metric offers deeper insight into the financial health of your company.
A business must be profitable to stay in operation, grow into new opportunities, and support its employees and stakeholders. A steady profit can also attract investors and boost stock value, which may lead to increased growth. Profits can be reinvested into the business or distributed to shareholders as dividends.
The most common metric used to measure profitability is gross profit margin, which compares sales revenue to direct costs related to producing and selling products or services. This metric reveals how efficiently you’re able to turn revenue into profits, which can be used to cover expenses and invest in future growth.
Operating profit is calculated by subtracting the COGS from gross profit, adding in all other business expenses such as rent, utilities, payroll, marketing, and research & development. This metric helps you identify areas where you can reduce costs without affecting quality or service, such as by optimizing the supply chain or improving production efficiency.
Net profit is the total amount of money left over after all business expenses are accounted for, including interest paid on debt and taxes. It’s the most complete measure of profitability and can be a great way to gauge overall financial health.