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Earnings and profit are related, but they are not exactly the same. Earnings and profit differ in terms of how they are calculated. Usually, earnings are the income a business earns, which may 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 money a company keeps after taking care of all of its business-related expenses. As such, a company may 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 earnings and profit. A gift basket company, for example, may collect $5,000 US Dollars (USD) for the sale of gift baskets in the course of a week. If it costs $2,500 USD to prepare these baskets, the gift basket company’s earnings may be $2,500 USD. The company may have $1,000 USD in other expenses, however, that reduce the amount of money it will actually keep. In such a case, the company’s profits may be $1,500 USD rather than the $2,500 USD that was left over after the cost of creating the gift baskets was subtracted.
Not understanding the difference between earnings and profit can have a devastating effect on a business. Often, new business owners begin to see large numbers of sales and become 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 rather than on how much they are profiting.
To understand how confusion about earnings versus profit can affect a business, it may help to consider an example in which a vendor receives $1,000 USD in sales for a week and thinks his business is doing well. If he subtracted the direct cost of selling his goods, he may see that his earnings were actually $600 USD for that time period. When he goes on to subtract all of his other related expenses, he may find that his profit is far lower than he anticipated. In fact, a business owner may even find that he failed to break even. If a business owner begins to spend money without considering his actual profit versus earnings, he may be laying the path for financial failure.
Earnings and profit calculations are often used to determine the financial health of a business. They are typically used in reporting business income to tax authorities as well. Often, tax agencies want to know how much a business has collected over a period of time, the cost of the goods or services it sold, and the amount of profits it has earned.
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