Earnings and profits are not the same; earnings are income minus costs, while profit is the cash a business keeps after expenses. Confusing the two can harm a business financially. Calculations are used to determine financial health and report income to tax authorities.
Gains and profits are related, but not exactly the same. Earnings and profits differ in terms of how they are calculated. Generally, earnings are the income earned by a business, which can be calculated after subtracting the costs of making, purchasing, or providing the items or services it sells. Profit, on the other hand, is essentially the cash a business keeps after taking care of all of its business-related expenses. As such, a company can have an impressive amount of earnings, but have very little profit.
It may help to consider an example when trying to understand the difference between gains and profits. A gift basket business, for example, might collect $5,000 dollars (USD) from selling gift baskets over the course of a week. If it costs $2,500 to prepare these baskets, the gift basket company earnings can be $2,500. The company may have $1,000 in other expenses, however, which reduce the amount of cash it will actually keep. In this case, the company’s profits might be $1,500 instead of the $2,500 remaining after subtracting the cost of creating the gift baskets.
Not understanding the difference between earnings and profit can have a devastating effect on business. Often, new business owners start to see huge numbers of sales and get excited prematurely. They measure the strength and success of their business ventures based on the number of sales they’ve made over a given period of time, not how much profit they make.
To understand how the confusion between profit and profit can affect a business, it might be helpful to consider an example where a supplier gets $1,000 in sales for a week and thinks his business is doing well. If he subtracted the direct cost of selling his products, he could see that his earnings were actually $600.00 for that period. When he subtracts all other related expenses, he may find that his profit is much less than anticipated. In fact, a business owner may even feel that he has failed to break even. If a business owner starts spending money without considering his actual profit versus earnings, he may be setting himself up for financial failure.
Earnings and profit calculations are often used to determine a company’s financial health. They are also typically used to report business income to tax authorities. Often, tax agencies want to know how much a business has collected over a period of time, the cost of goods or services sold, and the amount of profit earned.
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