Profit

Profit =Sales- Expenses

Profit equals sales minus expenses seems easy enough to understand. However, sometimes it is easy to overlook some of the details. For one thing most people believe that your profit is what you make above and beyond what you paid for an item. For instance if a store sells a candy bar for $100 but only paid 75¢ it would be easy to believe that the profit on that candy bar is 25¢.

Actually the 25¢ is the Gross Margin on the candy bar. This will be discussed in a later post.

Actually that is true up to a point. However, in a retail environment every item for sale has to pay its rent. Each month a retail store has to pay a rent or mortgage payment, electric bill, water bill, phone bill, internet access bill, payroll, insurance, maintenance etc. Every product that store sells has to contribute its share to paying those expenses.

If an item sits on a shelf and does not sell, it does not pay its rent. The longer the item sits on a shelf the more rent it has to pay when it is sold. So, if our candy bar sits on the shelf for two months then when it finally sells it has to pay its share of two months-worth of expenses. All the rest is profit.

Disclaimer
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Please be sure to consult your attorney and/or accountant with any specific questions.
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