Profit is calculated by taking the total amount of money made and subtracting all expenses associated with generating that income. Expenses can include costs like materials, labor, rent, utilities, and any other overheads necessary to run a business or carry out a transaction.
To illustrate, if your business earns $100,000 in sales but incurs $60,000 in costs, your profit would be:
Profit = Total Sales – Total Expenses
Profit = $100,000 – $60,000 = $40,000
This means, after covering your expenses, you have $40,000 remaining, which is your profit. Understanding this equation is crucial for any business owner, as it helps in assessing the financial health and profitability of your operations.