Profit

Also called Gross profit, Net profit, Bottom line

What is left after costs — and there are at least three different answers depending on which costs you mean.

What it means

Profit is revenue minus costs. The reason it confuses people is that "costs" means different things at different points, so the same business has several profit figures and all of them are correct.

**Gross profit** is your sales minus the direct cost of delivering them — materials, the wages of the people who did the work, whatever you had to buy specifically to fulfil the order. See cost of sales.

**Operating profit** takes gross profit and subtracts the overheads — rent, insurance, admin salaries, software, the things you pay whether or not you sell anything.

**Net profit** is what is left after everything else too: interest, one-off costs, and tax.

Why it matters

Someone asking "are you profitable?" and someone asking "what's your margin?" want different numbers, and quoting the wrong one makes a healthy business look sick or a sick one look healthy.

More usefully, the gap between the three tells you where a problem is. Weak gross profit is a pricing or a delivery-cost problem. Healthy gross profit and weak operating profit is an overheads problem. Those two need completely different fixes.

What it looks like in practice

A café takes £200,000 a year. Coffee, milk, food and the baristas' wages come to £120,000, so gross profit is £80,000 — a 40% gross margin. Rent, utilities, insurance, accountancy and the owner's own salary come to £65,000, so operating profit is £15,000. Interest on the fit-out loan is £3,000, leaving £12,000 before tax.

The owner "makes £12,000" and also "makes £80,000" and also "makes nothing" depending on who is asking and what they mean.

What to watch out for

Owner's pay. In a small limited company the director often takes a small salary and the rest in dividends, which makes profit look larger than the business really earns. Compare like with like by asking what it would cost to employ someone to do the owner's job.

Profit is not cash. See cash flow — the two can move in opposite directions for months.

One-off items. A year with a big grant in it, or a big legal bill, is not the year to draw a trend from.

Where to get proper advice

Your accountant produces these figures every year anyway; the useful conversation is asking them to walk you down the profit and loss account line by line once, out loud. Most will, and most owners never ask.