What is profit?

I have seen a lot of businesses recently offering a proportion of sales or profits to the bushfire appeal, and seen/heard various discussions about this. What thing that has stood out to me is that not everyone understands what a profit actually is, so I think it’s time to discuss it!

The concise Oxford dictionary gives the following definition…

profit: 1. advantage, benefit 2. pecuniary gain, excess of returns over outlay.

Or as a verb, it defines it as bringing or being of advantage.

Profit is different to proceeds or turnover which is the total amount of money coming into your business from customers. If you sell 10 items at $50 each, your turnover is $500 but your profit could be a lot less.

Simply put, profit is the money left over once you have paid all your business expenses. Or you can view it as profit = turnover – expenses.

So continuing from the above example, if each item costs you $20 to make and your overheads are $10 per item, your expenses are $30 and you will make $20 profit on each item. So from a turnover of $500 you will make $200 profit.

Expenses are everything your business spends money on to conduct business. As well as obvious costs such as materials and equipment to make products or products from a supplier, it includes what are known as overheads – the cost of electricity, marketing and promotions, staff, office/shop space, insurance, registrations, legal fees and so on.

Getting back to making donations as a business, ‘100% of profits’ would mean a $200 donation from the sale of 10 items whereas a ‘100% of proceeds’ would mean a $500 donation.