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What do we mean by profit?

What do we mean by profit?

9 April 2024

When most business owners refer to business profits, they are likely to mean the difference between sales and costs, and more concisely, that sales exceed costs.

Definition

Business owners often define profits as sales exceeding costs, however, they can vary as HMRC, banks, and traders may interpret it differently.

Costs might include:

  • Intangible overheads like depreciation;
  • Goodwill write-offs; or
  • Taxation.

These distinctions are crucial when benchmarking – comparing a business’s results with its industry sector.

 

Company Accounts

Company accounts show sales, costs, intangible write-offs, and corporation tax charges. But dividends taken by directors as part of their remuneration aren’t deducted in the Profit & Loss account. Most directors of small companies opt for low salaries and high dividends to save on NIC costs. So, reported totals after tax don’t tell the whole story. Dividends taken by working directors, which reduce retained profits, must be considered.

Therefore, the usefulness of “profit” as a business health indicator depends on understanding its definition.

Source: Other Tue, 09 Apr 2024 00:00:00 +0100

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