Profit = Revenues minus expenses. It's that simple!
So, let's dive in a bit more into the details of how to maximize this equation. Every business has Profit and Loss (P&L) statement that is generated at the end of each fiscal period. This statement is the fundamental document that lays out all the different variables that make up profit and loss for a business entity. Below are a few important variables/entries that are on the P&L statement that directly impact profit and loss.
When a business sells goods and services, this transaction generates sales which translates into revenue, the bedrock of profit creation and one of the biggest drivers of profitability. Some other important drivers of profitability related to sales are:
To support sales and revenues, a business has to spend money to make those sales happen, which are called operating expenses.
Typical P&L statement to illustrate how variables driven by sales and expenses influence profits
To calculate operating profit, you must subtract these operating expenses from gross margin, and then what remains, is operating profit. So, keeping operating expenses as low as possible will enable more dollars from sales to flow through to the bottom line as profits.
There are a few other expenses that businesses incur such as taxes, interest expenses, royalty expenses and such that are not part of the operating expenses but should be deducted from operating profit to calculate net profit.
So, to wrap it up. Increasing sales/revenues, selling the right product and services, expanding gross margins, and keeping operating expenses as low as possible are the keys to maximizing profits.