Profit

If you asked most farmers: ‘How much profit did you make last year?’ they would express their answer in terms of cash. The commonest answer would be ‘I had only $300 at the start of the year, now I have got $700, so I suppose I made $400 profit'. He has kept his family for the year, maybe bought an extra couple of goats, pigs, or cows, got a $200 loan from the bank which he does not have to pay back until next year, won some bets, married a second wife, and sold an old bicycle. Accountants and economists would shudder at his definition of profit - nonetheless, the $400 gain is real to him; in his terms, it is profit.

There are almost as many definitions, as there are, definers, of profit. For example, one person may define farm profit as the sum of:

Another person may use the rules of the local stock exchange in reporting the results of their, year's operations. A third person may follow a definition conjured up by the particular school of economics of which he is a devotee, and so on. We will indicate where we stand, and stick to that definition right through. The reader can then make any changes which suit his own situation.

When speaking of profit, most people have some notion of the money left over from income, after all the costs which were involved in earning the income have been deducted. Profit usually refers to some surplus or excess of income over costs (the net gain from a production process). To us, profit is the difference between the gross income and the operating costs. The operating costs are the sum of all the variable costs and the operating overhead (not total overhead) costs. Put another way, it is the total gross margin minus the operating overheads (see Chapter 5 for the definitions of these terms).