when a customer buys something from a business, unfortunately for that business not all of the
money it receives from the customer is profit in other words they don't get to keep all of
the revenue made from the sale and sometimes a business might even make what is known as a loss
in this video i'm going to explain some of the key differences between a profit and a loss and
show you some simple steps that you can take to be able to calculate the profit or loss of a business
let's start with profit now this is the important one the reason why
most entrepreneurs get into business in the first place because it's so crucial that they're able
to accurately calculate whether they make a profit put simply profit is the money that a business
is left with from its revenue after it's paid all of its costs and for all the risks that an
entrepreneur takes in business profit is one of the key benefits that they receive in return and
when a business makes a profit it's usually used to either financially reward the owners
invest in the future growth for the business or save for the future but what we don't want to be
doing in business is spending money which we think is profit when we've in fact made a loss therefore
we need to know how to calculate it accurately now the good news is it's a pretty simple calculation
all you need to know is the total revenue of the business and the total cost of the business
then you can apply the following formula which is total revenue minus total costs
and both of these figures should be available on the business' income statement which is
also known or was formerly known as a profit and loss account for the purpose of this video we'll
only be using a very basic version of an income statement and we'll cover income statements in
full in a later video so we're just going to be using the basic income statement to allow
us to get the figures such as the total cost and total revenues to be able to calculate whether the
business has made a profit or a loss so on your screen now you can see a basic income statement
which shows sections for both revenues and costs in this scenario the business has various sources
of revenue which total thirty thousand pounds and it also has several costs which total twenty five
pounds and all we need to do now is apply the formula total revenue minus total costs to
calculate whether the business has made a profit or a loss so in this example it's pretty simple
it's 30 000 pounds worth of total revenue minus 25 000 pounds worth of total cost giving the business
a 5 000 pounds profit now that we've got a good understanding of what profit is and how it's
calculated it's very important to understand that no business no matter how big or how small it is
is guaranteed to make a profit and when the costs of a business are higher than the revenue it
generates it has made something which is known as in business as a loss the good news is the
formula that we used to calculate profit a minute ago is exactly the same to calculate a loss just a
reminder this was total revenue minus total cost the key difference is all in the answer if the
answer is a positive number like it was in the previous scenario then the business has made a
profit however if the answer is a negative number then the business has made a loss in other words
total costs are greater than total revenues or the business is paying out more than it's receiving in
so on your screen now you can see another basic income statement which again has a section for
revenue and a section for costs in this scenario again the business has various sources of revenue
and this time the total is fifty thousand pound and it also has several costs which total sixty
thousand pounds so all we need to do now is use the formula total revenue minus total cost to
calculate whether this business has made a profit or a loss which in this example is fifty thousand
pounds of sales revenue minus sixty thousand pounds worth of costs leaving the business
with a ten thousand pound loss because the answer is a negative number it's minus ten thousand
now if a business makes a loss it can have very serious consequences and can even lead to the
business closing forever so it's important that if a business does make a loss that they analyse the
reasons why in full and then develop strategies to turn these losses into future profits this
is typically achieved in one of two ways either cutting costs or increasing revenues so that's it
a quick introduction to the concept of profit and loss and how it's calculated in business
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