Profit is what’s left over from a business’ revenue after all costs and expenses have been deducted. Whether you’re running a lemonade stand or a publicly-traded corporation, the bottom line is key to sustainable growth and attracting investors.
There are three types of profit, all located on your income statement: gross profit, operating profit, and net profit. Each reveals deeper insights into the performance of your business.
Gross profit is your sales revenue minus the cost of goods sold (COGS). This figure gives you an understanding of how efficiently your store produces and sells its products. It’s important to note that gross profit doesn’t include overhead, payroll, taxation, and interest payments, which are all part of your operating expenses.
Operating profit, or EBIT, is the total amount of your day-to-day operations — this includes staff wages, subscriptions (Shopify, apps, tools), rent or warehousing, and marketing expenses. This metric is a good place to start for a comprehensive analysis of your business’s health, and it’s typically reported in your revenue report each month.
Net profit is your gross profit plus all other non-cash costs, like depreciation and amortization. This figure is used to calculate your company’s cash flow, a valuable metric for long-term planning and growth. This metric is also a great indicator of your business’s overall health and can be used to compare it with competitors. You can think of it as your “free money” that can be reinvested in the business, saved for emergencies, or distributed to shareholders.