Profit describes the financial benefit

realized when revenue generated from a

business activity exceeds the expenses,
costs, and taxes involved in sustaining the
activity Any profits earned funnel back
Profit to business owners, who choose to either
pocket the cash or reinvest it back into
the business. Profit is calculated as
total revenue less total expenses.
Gross Profit

The first level of

profitability is gross
profit, which is sales Gross Profit=Total Sales−COGs
minus the cost of goods
sold.
Operating Profit

THE SECOND LEVEL OF PROFITABILITY

IS OPERATING PROFIT, WHICH IS
CALCULATED BY DEDUCTING
OPERATING EXPENSES FROM GROSS OPERATING PROFIT=GROSS PROFIT−
PROFIT. GROSS PROFIT LOOKS AT OPERATING EXPENSES
PROFITABILITY AFTER DIRECT
EXPENSES, AND OPERATING PROFIT
LOOKS AT PROFITABILITY AFTER
OPERATING EXPENSES. THESE ARE
THINGS LIKE SELLING, GENERAL, AND
ADMINISTRATIVE COSTS (SG&A).
 Net
Profit The third level of profitably is net profit,
which is the income left over after all
expenses, including taxes and interest, have
been paid.

Net Profit=Operating Profit−Taxes 
& Interest
Profit Theories
 Theory of rent
by , prof. F.A. walker
“profit is the rent of ability”

Rent – remuneration for the use of land to

land lord

Profit – reward for ability of entrepreneur

According to Professor Walker

As rent is the difference between least & the most

fertile land similarly, profit is the difference between
earnings of the least & the most efficient
entrepreneurs
 Criticism
- Rent & profit are not similar
. rent is always positive
. profit is positive as well as negative

- Absence of marginal entrepreneur

- profit is not the rent of ability

 Dynamic theory
by , prof. J.B.clark

According to clark – profit arises in a

dynamic economy not in static .
 Criticism
• All economies are dynamic

• Profit is not the result of each change

• Theory ignores uncertainty & risk taking

Theory of risk
By , Prof. Hawley

“NO RISK NO
GAIN”
 Criticism
• All risk do not lead to profits

• Profit is to avoid risk

• There is no direct relationship between

risk & profit
 Theory of innovation
by, prof. schumpeter

Profit is reward for innovation

Theory of uncertainty bearing
by, prof. knight

“Profit is the reward for

uncertainties bearing”
 Criticism

• uncertainty is not measurable

• Profit is not the reward for uncertainty

bearing only