What do profits and proceeds mean?
Profit is the total income, minus expenditures. The money and other benefits a non-governmental organization receives, in exchange for products and services sold at an advertised price.
Proceeds refer to gross revenue; it’s the cash received from the sale of goods or services.
How to Tell the Difference between Profits and Proceeds?
Many times profits and proceeds are used interchangeably. However, that should not be the case, as they do not mean the same thing.
A profit benefits and is of use to somebody while proceeds are the total money brought in from a transaction or event.
Most people are concerned about the money they donate to charity. All the money collected from the contribution minus the operating cost is proceeds. This is called 100% of net proceeds.
Proceeds can mean either the gross money earned, that is, all the money that was brought in, or the net, meaning all the money left after expenses. Often, proceeds is considered to be the entire amount of money collected in sales.
Proceeds can either be the total amount derived from an event or sale, or it can be the amount of money remaining once the costs of production are deducted. Typically, proceeds are the item’s net profit.
- The notable difference is tax – profit does not include tax payments as tax calculations are based on a percentage of the profits, that is, the net profit figure is required before the tax calculation can be done. Proceeds on the other hand, in terms of net proceeds, is the amount of cash received from the sale after paying for expenses, fees, and taxes. Earnings before interest and taxes is an indicator of a company’s profitability, it is hence considered as profit.
Difference between Profits and Proceeds in Detail
Some terms that are similar to proceeds are revenue, profit, and income. They can be comparable to either net or gross proceeds depending on the context of the situation. It is however important to note that proceeds and profits generally do not mean the same thing, even though there is a relationship between the two.
A profit, which is also the net income, is the value of earnings that exceed expenses for the period. It’s the amount of income left over after all the necessary and matched expenses are subtracted for the period, while proceeds mean the revenue collected from selling a good or service.
Understanding Profits and Proceeds
All of the expenses that are incurred to produce an income must be recognized in the period in which the revenue is earned. Thus, some expenses that are not paid during the period are still subtracted from income to arrive at the net profit for the period.
Net proceeds is the amount the seller takes home after selling an asset, minus all costs and expenses that have been deducted from the gross proceeds. The amount that constitutes net proceeds could be marginal or substantial, depending on the asset that has been sold. Capital gain taxes should be paid on the net proceeds of a sale, not the gross proceeds.
Net proceeds is the final amount a seller receives from the sale of an asset after all costs have been taken into consideration. Depending on the asset, the cost can include legal and appraisal fees, expertise- or technology-related fees, commissions, such as brokerage or technology platforms commissions, advertising or digital media costs, taxes, and regulatory expenses. Being aware of all of the costs that go into a sale of an asset is important as it helps determine the appropriate selling price.
One area that commonly impacts net proceeds from a sale is the sale of a house. When calculating net proceeds on a home sale, the outstanding mortgage or other liens on the property, commission for the seller’s and buyer’s agent, excise tax, and other closing costs owed by the seller, are subtracted from the gross sale price of the home.
How Important Are Profits And Proceeds?
Sales is an indicator of the success of your business.
Profits, as stated earlier, is the amount of money that is left after subtracting the total business expenses from the total revenue. It is a calculation that includes almost all financial transactions in the business.
Profits indicate the available money to pay to the owners and/or invest back into the business.
Comparing gross and net proceeds can help a business to understand how much profit is being lost to expenses and can even help with determining how profitable a company is. This is called profit margin.
Net profit is important as it demonstrates the success of a business. It is a far more significant figure than revenues as there is no point in making lots of sales that ultimately don’t generate a profit.
Net profit also indicates the available money to pay to the owners and/or invest back into the business.
Profit is also important to the interest of the following groups;
The Revenue: Profits are used to calculate the amount of tax a business owner must pay.
Banks and other creditors: banks and other organizations that loan to businesses use the net profit figure to get a better understanding of the business and to assess the suitability of the loan. In particular, the net profit will give them an indication of the owners’ ability to pay.
Competitors: if it’s a limited company, the company’s competitors will be able to access the net profit by analyzing the return submitted to the tax authorities. This will give them a better understanding of the business and how successful it is.
Investors and shareholders: net profit is crucial if one is seeking investment in their business, or if there are shareholders. A healthy and consistent net profit figure will give investors confidence and assurance that they will get a return.
How Can I Improve Net Profits?
How successful a business is or not is based on how much net profit is made. It is therefore important for one to be knowledgeable on how to improve net profits. Implement the following methods and watch your business rise beyond your expectations.
Reduce overheads: reducing overheads can give one an ongoing reduction in costs, depending on the overhead. It includes saving on telephone bills, travel expenses, staff salaries, and more.
Reduce the cost of goods sold: this includes negotiating better prices with suppliers, making the manufacturing process more efficient, outsourcing, and more.
Increase sales volumes: to spread costs in business as far as possible.
Getting advice: this includes professional accountancy advice.