Profits: Overview, definition, and example
What is profit?
Profit is the money a business earns after subtracting all its costs. It’s the financial gain that remains once expenses like rent, salaries, and materials are covered. In simple terms, profit is what’s left over when a business makes more money than it spends.
Profit can be categorized in different ways:
- Gross profit – Revenue minus the direct costs of producing goods or services.
- Net profit – The final amount after all expenses, including taxes and overhead, are deducted.
- Operating profit – Profit earned from core business activities, excluding things like interest and taxes.
Why is profit important?
Profit is what keeps a business running. Without it, a company won’t survive in the long run. Profits allow businesses to:
- Grow and reinvest in new opportunities.
- Pay employees and business owners.
- Attract investors and secure loans.
- Cover unexpected expenses.
Beyond financial stability, profit is also a key factor in business valuations, partnerships, and contracts. Many agreements, like joint ventures and revenue-sharing deals, include specific terms on how profits will be split among the parties involved.
Understanding profit through an example
Imagine you run a bakery. You sell a cake for $50, but the ingredients and labor cost you $20. Your gross profit is $30.
After paying for rent, utilities, and marketing, your total monthly expenses come to $5,000. If your total sales for the month add up to $10,000, your net profit is $5,000.
This leftover profit can be reinvested in new equipment, used to expand the business, or taken as earnings. Without profit, you’d be operating at a loss and eventually run out of money.
An example of a profit-sharing clause
Here’s an example of a profit-related clause in a business contract:
“All net profits derived from the operation of the Business shall be distributed among the Partners in accordance with their respective ownership percentages. Profit distributions shall be made on a quarterly basis, following the deduction of all operating expenses, taxes, and other liabilities. In the event of a dispute regarding profit calculations, an independent accountant shall be appointed to review and finalize the amounts due.”
Conclusion
Profit is the lifeblood of any business, ensuring long-term sustainability and success. Whether you’re running a startup, negotiating a partnership, or managing investments, understanding how profits are earned, calculated, and distributed is essential.
By clearly defining profit-sharing terms in contracts, businesses can prevent disputes and create fair agreements that benefit all parties involved. Keeping an eye on profitability isn’t just about making money—it’s about making smart financial decisions for the future.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.