What is profit? For most individuals, profit simply refers to the difference between total revenue and the total expense. In accounting and business, profit is the income of an entity minus expenses, expense, depreciation and taxes, for an accounting period. In other words, profit is the difference between total revenues realized minus total expenses incurred.
The difference between the total revenues and total expenses is called gross profit. In order to achieve a profit, there must be some proportion of gross profit that can be earned back. If all expenses are less than the gross profit, then the difference between revenues and expenses will be termed as loss and traders will be unable to pay back their investors.
In order to attain a profit, an individual would usually have to devise an effective method of calculating profit. One of the simplest profit formulas is the Paret’s Formula. This is actually an Excel template that can be used in calculating profitability as well as an overview of profit and loss. Other profit formulas include the Fibonacci Formula, R-function, optimal benefit, optimal revenue, multiple-period view, discounted cash flow, and the logistic function. However, most traders prefer the traditional logistic function because it is consistent and reliable.
To get the best profit, traders must ensure that their firm has its expenses in their control and manages its profits in a manner that maximizes revenue while minimizing expenses. It is important to maintain a positive bottom line. A trader must also make sure that his firm is able to retain its customers and keep them as customers if it expands its business. If traders manage to maintain positive bottom lines, then the profit generated per transaction is expected to be higher compared to the profit earned per transaction in a company that operates on the losing side of its business.
Positive earning for a particular period usually results to revenue growth. Consequently, it is advisable to increase profits monthly or quarterly by keeping a constant level of revenue dollar amount. Although this may be risky if one’s business relies on its profitability, constant earnings are the best strategy for a trader to avoid fluctuations on the profit margin. In addition to this, stable earnings will also enable traders to expand their business by taking on new clients.
Most profit calculators will allow a trader to enter into certain modes such as constant revenue or constant profit. The constant profit mode is considered more practical for those who would like to earn a profit without having to worry about changes in stock prices or exchange rates. This is because the profit motive of this mode is to earn a profit regardless of changes in market conditions. Constant profit is a popular profit motive used by traders who have small or medium enterprises that rely on constant revenue as their main source of income.
The constant profit mode is very good if you are in a business that is dependent on constant innovations and improvements on your products or services. However, for a business that makes use of its innovations and improvements on a regular basis, a negative bottom line is expected as profits will still be based on constant revenue. Therefore, it is advisable to choose the constant profit mode only when you are confident that your business will experience minimal changes in its profitability. A negative bottom line might result to short-term profit loss, especially if the business experiences sudden fluctuations on its profitability.
If you want to achieve a sustainable profitability level as your main goal, it is important to control expenses. A large percentage of operating profit is contributed by the expenses incurred during the production of your goods or services. In most cases, a healthy profit margin can be realized from the high level of operating profits. It is not uncommon for businesses to incur a lot of expenses such as labor costs, raw materials, repair and maintenance costs, overhead charges, utility expenses and other indirect expenses. These costs will greatly affect the profitability of a company but can be offset through the proper use of profit reduction strategies.