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Types of Profit

by TheKinvest 4 months ago in business

Read about the 4 types of profit!!

Total Revenue

Total revenue is the value of all sales made by a company in a given period of time. Most companies do it quarterly. Revenue is also referred to as turnover, sales revenue, gross sales, or “top line” due to the fact that it’s displayed at the top of the income statement of a company.

How To Calculate Total Revenue

To calculate revenue, we take the selling price of a product and multiply it by the total number of sales; (Revenue= Total Sales x Price). For instance, if a company sells 500 units at a price of $10 each then the company will have a revenue of $5,000; (500 x 10= 5,000).

Real-Life Example

During the last quarter of 2019 Amazon generated a total revenue of $87 billion. Following the uptrend during the last quarter of 2020 Amazon increased its total revenue by more than 30% compared to the previous year, ending the quarter with a total revenue of $125 billion. In this case to find total revenue Amazon must first find the average price per unit and then multiply it by the total number of sales (unknown data).

Gross Profit

The profit a company makes after deducting the total cost of goods (COGS) sold is known as gross profit although it’s also referred to as sales profit or gross income. Gross profit also reveals a company’s efficiency in terms of making the best use of labor and supplies to produce goods and services.

How To Calculate Gross Profit?

To calculate gross profit, first determine what is the cost of goods sold (COGS), second, calculate your total revenue, and lastly, subtract the total revenue from the COGS (Total Revenue - COGS = Gross Profit). For example, a company has a COGS of $50 and a Total Revenue of $120. Therefore, the company’s Gross profit is $70 ($120 - $50 = $70).

Real-Life Example

To calculate the annual gross profit for 2020, Microsoft first determined its COGS, which in this case was $46.078 billion. On the other hand, Microsoft had an annual total revenue of $143.015 billion. With this information Gross Profit can now be calculated; (Total Revenue = $143.015) - (COGS = $46.078 billion) = (Gross Profit = 96.937 billion). Compare to last year, Microsoft saw an increase of %16.89 since its previous 2019 gross profit was $82.933 billion.

Operating Profit

Operating profit is the profitability of a company after subtracting all necessary expenses to keep the business running from the gross profit. In addition to COGS, necessary expenses include fixed-cost expenses like rent and insurance, variable expenses, for instance, shipping and freight, payroll, utilities, amortization, and depreciation of assets. Interest and taxes are not included. In fact, Operating profit is also referred to as earnings before interest and tax (EBIT).

How To Calculate Operation Profit?

To calculate operation, first, determine what the gross profit is; remember (Total Revenue - COGS = Gross Profit), then subtract operating expenses, depreciation, and amortization from the gross profit (Gross Profit – Operating Expenses – Depreciation – Amortization = Operating Profit). In case the gross profit isn’t determined at the beginning, the formula can also be express as (Total Revenue – COGS – Operating Expenses – Depreciation – Amortization = Operating Profit). For example, a company has a total revenue of $100 million, COGS of $30 million, operating expenses of $15 million, and Depreciation and amortization of $5 million. Using the first formula, gross profit must be determined first ($100 M - $30 M = $70 M), now we can calculate the operating profit of the company (Gross Profit = $70 M – Operating Expenses = $15 M – Depreciation & Amortization = $5 M = Operating Profit = $50 M). Now try it using the second formula!!.....

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