Profit

Profit is money added to a transation by a seller to pay for business overheads.

Profit may also be defined as the income less expense on a transaction.

 

Profit is essential and a company that loses money will not survive any longer than its balance sheet reserves allow.

 

A transaction's selling price is broken down into a number of components. Understanding the value required is essential to personal or company survivial. The purchase cost of the goods sold (grey) represents a break-even point, the overhead costs (green) are represented below, and a provision for strategic reserves (orange) is moved / stored into the balance sheet (yellow).

 

Various overheads will include;

  • Wages;

  • Owner and shareholder dividends;

  • Utilities;

  • Rent;

  • Cost of goods sold; and

  • Non-transactional taxes.

Profit

Balance sheets reserves are kept for the company to survive in poor times, that is when expenses exceed income. These reserves can be drawn on to make up the profit shortfall until the company becomes transactionally profitable again. If the reserves run out while the company is unprofitable then the company becomes bankrupt.

 

Profit is a natural cycle that occurs in nature and humans as well as personal and corporate finance. For instance when a seed is dropped, it needs energy to grow, if it receives more energy than it needs to sustain itself then it will grow, that is, it will use the excess energy and nutrients to build itself into a mature plant. If it receives less than it requires, it will die. This is the same in animals with one difference, excess food is stored as fat until required.

 

Further Reading

Accounting Profit (wikipedia)