2/23/2017

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Making A Profit

"The worst crime against working people is a company which fails to operate at a profit." 
~Samuel Gompers~

Profit is the advantage or gain, benefits or the excess of returns over outlays or expenditures. It is the return from the use of capital after deducting the amount paid for raw materials and for wages, rent, interest, and other costs. In simpler terms, profit is what is left of earnings after the payment of all expenses.

In an economic system, profit is derived from the buying and selling of goods and services whereby those goods and services are produced at a cost less than what a buyer is willing to pay for them. If costs and expenses are calculated to be more than income, it results in a loss.

  • The rewards gained by an entrepreneur for taking risks is called pure profits.
  • The gain of profits that exceed normal expectations, usually caused by unforeseen events, is called windfall profits.

Profits are calculated as an excess of total income earned within a specific amount of time after subtracting costs and the expense of doing business during that period.

  • Gross profit: The excess of receipts from sales of goods and services over expenditures for production or purchase.
  • Net profit: The surplus remaining after all necessary deductions such as interest, bad debt, and other costs are subtracted from gross profits.

In order to maintain a viable business, a company must produce a profit. Profits provide the funds for maintaining business functions and is the lifeblood for any business enterprise.

How are profits distributed from a business?

  • In an individually owned company, the net profits belong to the owner.
  • In a partnership, the profits are divided amongst the partners as determined beforehand by the partnership agreement.
  • In a corporation, dividends are paid to stockholders after tax payments are first deducted from net profits.

Making a profit is the real motivation for most people who make the decision to start a business. Profits are necessary to attract investors who may supply additional capital and other resources to grow the company. The expectations of future profits is also what encourages individuals to take risks and to gamble in hopes of increasing their wealth.

 

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