Finance Management

Profit Definition (B)

What is the Profit definition? What is the relation of Profit and Revenue? How do we influence the Growth of the Profit?

Posted: Feb 2008

Profit is important financial indicator and represent a main Key Performance Indicator ( KPI ). It is different from Revenue but this time costs are taken into account. Profit is Revenue deducted by COGS and OPEX.  

Profit = ( Volume x ( Unit Price – COGS )) – OPEX

Profit is the most important and relevant indicator, because all activities, Sales, Revenue, and Promotions are conducted because of the Profit at the bottom line. Without Profit, Volume or Revenue have no sense.

However, in special cases Profit can be sacrificed for a period time, if you want to achieve a certain strategic goal, like significantly increase volume, or increase market share.

In those cases, giving up the profit for a period of time, with purpose of increasing the market share, can bring extra Revenue and Profit, once the Volume and Market Share are grown.

The Profit can be increased through increase of Revenue, but also through decrease of COGS ( Cost of Goods Sold – the value of materials built in and direct costs in product, without margin ) and reduction of OPEX ( Operational Expenses of company – all indirect costs ).  

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