The Importance of Profit in a Business

Written by steve brachmann
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The Importance of Profit in a Business
Profit is very important to businesses in capitalistic economies. (profit image by Jaroslaw Grudzinski from

Everyone in business hears "the bottom line" referenced when talking about the relative strength of a particular company. Although people talk about it, not many can adequately define what "the bottom line" really entails, apart from the ability to keep business operating. Profit is an important indicator of how long a company can stay in business using current cost and pricing standards. If a business is operating without a profit, it won't be in business for long.

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A business's profit refers to the difference between money made and money spent over a set length of time. A successful business will have more money coming in through revenue then it sends out through expenses during that period. Profit is the reason a business owner wants to start a business, as the extra money is a reward for the risk undertaken in starting up the business. Profits can also be put back into the company to improve business operations and its relationship with local customers.

Profit vs. Cash

Although profit is an indicator of how much cash will likely have on-hand, cash is more important as a measure of day-to-day business. Cash, which includes coins, bills, short-term deposits, short-term loans and foreign currency, pays for the workers and goods that keep a business moving. Proper cash flow management between profit cycles is crucial in strengthening your business. If you can't pay your workers, you cannot get to the thousands of dollars in profit which you would have received for doing business.

Ways of Looking at Profit

A company's profit can be viewed through a number of different lenses to determine the operating strength of the business. Gross profit looks directly at the income made through sales minus all expenses derived from materials going in to the goods or services sold. This helps a business judge both sales prices and materials used. To find the net profit, which indicates a company's operating efficiency, take the gross profit and subtract all other business expenses, such as wages and office rent. Other types of reported profit include net profit after interest and taxation as well as retained profit, which is profit left over after shareholders are paid dividends.

Investment Funds

Profit becomes most valuable to a business when it is reinvested in the company for materials to increase the number of workers or to set up new lines of operation. This is what is referred to as growing your business; by taking the profits your company earned over a period of time and improving some aspect of your business, you signal to consumers and shareholders that the company's cash income is staying with the company. Even donations to local charities or funding public works can be seen as a reinvestment of profit as it builds up the relationship between your company and the surrounding community.

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