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This Lesson (Personal Finance: Profit and Loss) was created by by Shruti_Mishra(0)   : View Source, ShowAbout Shruti_Mishra: I am a maths graduate from India and am currently persuing masters in Operations Research.
Profit forms the underlying motive of most of the businesses and even for small transactions, an individual likes to know if it was profitable for him. On the other hand, no one wants to make a loss on a transaction.
Simply put profit can be defined as the excess of revenue over cost. Thus the formula for calculating the profit will be If revenues is less than cost, then the result will be negative. In this case, the result actually is a loss. The formula for calculating loss (if revenue < cost) would be Example: Calculate the profit if the revenue is $400 and cost is $250. Solution: Profit = $400 - $250 = $150 Basing any transaction decision on the basis of absolute profit value can be misleading. Consider a case where you have two types of transactions to chose from. The revenues associated with them are $400 and $1000 respectively and the costs are $200 and $600. The profits can be calculated as $200 and $400 respectively. It would seem tempting to choose the second one. However, if you had only $600 to spend, then you can either go for 3 transactions of first type or 1 transaction of second type. You will make $600 in the first one and $400 in the second one. Thus for every $600 of cost you can make more profit in the first transaction. A better method to compare transactions or evaluate profitability is thus profit margin. Profit margin is defined as profit as a percentage of the revenues, i.e. Consider the previous example. The profit margins on the two transactions would be Profit Margin(1) = 1 - $200/$400 = 50% Profit Margin(2) = 1 - $600/$1000 = 40% It can be seen that the first transaction is more profitable than the second one. For calculating profit and profit margin, use the profit calculator. This lesson has been accessed 742 times. |