What is meant by “Profit”?
In general terms, profit is synonymous to the word “gain.” However, the definition of the same word is a bit more complex than that in financial terms. In accounting terms, the profit of a company or business stands for profitability and is seen as the income or the money that is realized by the business after finishing a business activity or a business process. This profit or money gained by the business owners can be used as money for the business only or as per their choices.
Are profit and profit margin the same things?
Any profit for a business is the revenue earned by the company after the subtraction of expenses and gross sales of the business. The amount that remains is the profit. Profit margin, although sounds similar, is a bit different than what we mean by profit.
To begin, the calculation of profit margin is done with the help of a different formula, here it:
Profit Margin = Net Income / Net Sales (revenue)
The profit margin for any business is arrived at not only subtracting gross sales and business expenses from the net income of the business but also by subtracting other variables such as material cost, operational cost, variable costs, etc.
There are various kinds of profit margins. A company can divide and break down any kind of profit into any kind of profit margin to suit their purposes and motives. A business can make use of profit margin to understand their own functionality in a better manner.
Is there something called “healthy profit margin”?
Well, there is a ceiling rate for a good profit margin for your business. Furthermore, 25% of operating profit is considered as the favorable rate for profit. However, it must be remembered that a profit margin for every business and industry the average profit margin varies significantly.
Is profit important for your business?
Profit in any business is important. The profit percentage or simply profit from your shows you if you are working in the correct direction or not. If there is no profit in a business, then you are probably not managing your business well. However, if your business is earning profits, then it means that your business is growing.
The more profit your business makes, more money you can bring back home. The initial profit for any new business is at least 10 to 12%. However, as your business grows, your overheads neutralize and remain the same while your sales are larger, which improves your profit margin significantly.
What does turnover mean?
Turnover for any business or corporation in simple terms means its gross sales for a year or for one accounting or financial year. The number of sales or the revenue generating activities for a business could arise out of anything. It could arise out of interests, royalties, or from any other financial or business activities.
In other words, revenue is the amount of money earned by a business or a corporation for a fixed period of time.
Is turnover a measure for the success of a business or is profit the measure for success?
Well, when it comes to measuring the success of a business, turnover is a part of sizing your business. But it is never a measure for business. The primary reason for this is that the prices for your sales and goods change all the time, and the number of sales cannot indicate the profitability of a business. Turnover can indicate the growth of your business and how well it is performing when compared to the previous records, but there is no legit indication of success.
However, profit of a business is the only way to express the success of a business. There is a reason behind it, and the reason is that when you begin or start a business, you invest some money in the business. Over the course of time, you intend to recover the invested money out of business and begin earning profits. Profit for any business is what the owner earns. The money you earn profits in a business is what you take back home. And any business that does not make a profit, is sustaining losses and will end up failing.
What is the difference between turnover and profit?
In simple and the easiest terms, turnover is the net sales achieved by the business for a period of time and profit is the amount of money that remains with the business or the business owner after deducting various expenses and costs for the functioning of the business.
To explain it differently and in a better manner would be to call these two the end and the beginning points of the income statement. Turnover or the revenue is the first line of the income statement, and the profits of a business are bottom-line results.
Comparison of turnover and profits
When we hear a business person talk about profits or any other person talk about profits, we should automatically assume that these people are referring to the net income, the amount that remains after removing or charging all expenses for a business.
And when people use the term “turnover”, we must assume that the person is talking about their company’s or their business’ total sales for the year and not for some months, unless they choose to specify.
Are you a startup or small business and need expert consultation of working out turnover & profit for your business? We at DNS Accountants will be more than happy to help you through our Business Startup services.
Share this post