First, let's start with the definition of profit being profit is the difference that arises when a firm's sales revenue exceeds its total costs. This can be shown in an equation Revenue-Total Cost=Profit. With profit, there is also different types of profit. One type of profit managers use a lot is operations profit, which is the amount remaining once all fixed and variable costs have been deducted from total revenue, but before tax has been paid. But, what is the importance of profit?
It goes without saying that profits are important to the majority of businesses. Profits are usually assessed in relation to some yardstick - for example, the amount invested or sales revenue.
Profits are important because:
- they provide a measure of success of a business which is important for new businesses.
- they are the best source of finance/capital to invest in expanding the business. See why here.
- they are act as a magnet to attract further funds from investors enticed by the possibility of high returns on their investment.
- payments to the owners of the business, to partners or to shareholders in the form on dividends.
- reinvestment into the business to purchase capital items such as property and machinery.