Computing Business Profitability The basic foundation and ultimate goal of most businesses is to generate profits from which business growth can be realized. Profit generally is the making of gain in business activity for the benefit of the owners of the business. Just like the blood that circulates throughout the body, profit is vital to the existence and expansion of a profit-seeking organization. Computing this profit is significant because it is from the result of the computation that one is able to make important decisions in the business. Economic Profit is different from Accounting Profit. Economic profit is the increase in wealth that is made from an investment, taking into consideration all costs that are linked with that investment including the opportunity cost of capital. Accounting profit is the difference between retail sales price and the costs of acquisition (whether by harvest, extraction, manufacture, or purchase). Computing Business Profitability affects many decisions made inside the business and externally also. How does business profit affect a business? a. Taxation - your profit will determine the amount that is paid or not paid for taxes. b. Business Growth - this is normally determined by how profitable a business is or its potential for profitability. c. Share Price - if it's a publicly traded company then the price of the share is affected by the profit of the company. d. Financing - your profitability will help to determine the level of finance you can get for your company. The Profit and Loss Statement This is a financial statement that shows the revenues, costs and expenses generated during a specific period of time - usually a fiscal quarter or year. These records provide information that shows the ability of a company to generate profit by increasing revenue and reducing costs. The profit and loss statement is also called "statement of profit and loss", an "income statement", or an "income and expense statement". The format of the profit and loss statement is basically your revenues less your cost of business operations. That is Sales - (Cost of Goods + operating expenses + tax expense + interest expense) = Profit Here's an example of an income statement: Sales $250,000.00 Cost of goods sold $100,000.00 Revenues: GROSS PROFIT $150,000.00 -------- Expenses: ADVERTISING $ 22,967.00 INSURANCE 6,765.00 LEGAL & PROFESSIONAL SERVICES 725.00 OFFICE EXPENSES 33,557.00 OTHER BUSINESS PROPERTY 12,860.00 LICENSES 5,234.00 PROMOTIONAL 2,397.00 BANK & CREDIT CARD FEES 2,180.00 TITLES & FEES 5,854.00 BOOKKEEPING 540.00 -------- Total Expenses $93,079.00 -------- NET PROFIT $ 56,921.00 There are many factors that affect and contribute to a business' profitability that could never be covered in one article. Just keep in mind that the purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. Then from that information, decisions can be made effectively. Michael Reid Michael Reid - marketing/promotions Small Business Promotions, Inc http://www.submitarticlesforfree.com you can redistribute this article freely but you must keep my contact information including my website address.