Profit is the surplus left once a business's expenses are subtracted from its revenue. It is not a single figure but a family of figures struck at different points on the income statement, each subtracting a different layer of cost: gross profit after cost of sales, operating profit after operating expenses, and net profit after interest and tax.
What it means
Reading "profit" without qualification is ambiguous - a healthy gross profit can still mask a loss further down the statement if overheads, interest or tax are heavy. Each profit figure answers a different question: is the core trading margin healthy, are operations efficient, and is the business profitable overall once everything is accounted for.
Where it fits in
Payroll cost is deducted at different stages depending on the role: direct production labour reduces gross profit through cost of sales, while administrative and management salaries reduce operating profit as operating expenses. By the time net profit is struck, the full cost of employing people has been taken into account.
Key rules
- An umbrella term, not one figure - gross, operating and net profit measure different stages.
- Each profit level subtracts progressively more cost from revenue.
- A loss can hide behind a healthy gross profit further up the statement.
- Payroll cost lands at different profit levels depending on the role's function.
