Whether you run a lemonade stand or manage a publicly-traded multinational corporation, the most important thing for most businesses is to bring in more money than they spend. Increasing profits is key to long-term success, attracting investors, and building reserves for future expenses. Profit is one of the main signifiers of business goals and success, but calculating profitability requires more than simply subtracting expenses from revenue. This article will guide you through the different types of profit and how to assess them, and offer practical tips for improving profitability.

Understanding the Difference Between Profit and Profitability

While often used interchangeably, profit and profitability differ in a key way. Profit is an absolute figure representing how much your company earns after expenses, and it’s reported as gross profit, operating profit, or net profit. Profitability, on the other hand, is a ratio that measures how efficiently your company generates profit relative to its revenue, assets, or equity.

While the three types of profit offer a variety of insights into your business operations, the most complete and useful measure of a company’s profitability is net profit. This reflects the total amount of earnings left after all expenses have been paid, including the costs of goods sold and general day-to-day business expenses like rent, insurance, and office supplies. Net profit can be reinvested into growth, distributed to owners, or saved as reserves for future use. Tracking this metric regularly can help your company manage financial risks and make informed strategic decisions.