What is Profit?
A business – as well as the person or people who own and manage it – is a firm that offers goods or services for
sale to customers at a price to provide income. This income (money) pays the firm’s expenses and also gives
the owners a livelihood. If owners can’t earn a livelihood from their business they must close their firm’s
doors, fire their employees, and go to work for somebody else to earn a living (wages).
The “bottom line” – profit (or loss). In the private sector a firm is in business to make a profit. That’s what
some people call “the bottom line.” The profit (or loss) figure is the last one given on the bottom line of the
income statement. Owners prepare an income statement at the end of every month, quarter, and year to see if
they have earned a profit or suffered a loss. Profit, then, is defined as “net income after deducting the costs and
expenses of doing business and paying taxes.”
Return on investment. Company owners expect to earn a return on their investment in addition to a livelihood
for themselves. This “return” can be compared with the interest people receive if they put their money into a
savings plan instead of putting it into opening and operating a business. Suppose you have $10,000 saved. If
you put this money into a top-dollar savings plan, you might earn 10% ($1,000 annually/$83.33 per month).
Instead, assume you use the money to open the Print-On T-Shirt store. You want to earn a monthly income for
yourself, plus a return on your investment. Rather than earning, say, $650 a month by working for someone
else, you hope to earn an equal amount plus an investment return from your business.
Income statement. Calculate this month’s income statement to see how you are doing in your business. Then
answer and discuss the questions that follow.
Print-On T-Shirt Store
Income Statement
For Month Ending August 31, 2004
Revenues (income):
Sale of T-Shirts
$ 6,540
Cost of T-Shirts (wholesale)
- 3,220
Gross Income
Expenses:
Employee wages
$ 1,150
Rent for store
425
Utilities and telephone
175
Advertising
300
Insurance (fire, theft, etc.)
75
Supplies
125
Miscellaneous
+
230
Total expenses
Net Income (loss) before taxes
Taxes
Net Income (loss) after taxes
(divide profit or loss by $6540 and multiply
by 100 to get the percentage)
$ _______
- $ _______
$ _______
- $ __84___
$ ________ _______%
Questions and discussion: (1) Did you make a profit or suffer a loss? (2) What percent of profit or loss did you
make? (3) Earning $650 working for someone else, and putting your $10,000 into savings, would you do better
this month running your own business or working for someone else?