The most important business equation is the formula for profit. It is because a business must satisfy needs and wants of customers profitably to be successful in the longer term.
A business is a decision-making organization that is involved in the production process of goods and services, and trading them to customers. Businesses exist to turn inputs into outputs.
Costs » Sales Revenue » Profit
Inputs are scarce resources and outputs are final products such as goods and services. The production process that businesses are involved in is the process of turning inputs into outputs.
Costs
The business incurs Fixed Costs (FC) and Variable Costs (VC) when the inputs are being processed into outputs. Inputs are all the resources that a business uses in the production process, e.g. land, raw materials, components, machinery, equipment, labor, etc.
Total Costs (TC) = Fixed Costs (FC) + Variable Costs (VC)
Fixed Costs (FC) added to Variable Costs (VC) give Total Costs (FC).
Sales Revenue
Outputs are final tangible goods such as cars, clothes or furniture, and intangible services such as education, business consulting or healthcare. After the outputs are sold out to final customers at the certain price, the business generates Sales Revenue:
Sales Revenue = Price x Quantity
Profit
By subtracting Total Costs (TC) from Sales Revenue, the company generates Profit, the ultimate goal of most of the businesses:
Profit = Sales Revenue – Total Costs (TC)
The success of any business depends on many others factors, but most importantly, whether the business supplies goods and services that consumers desire to buy, and whether the business makes profit at the same time.
The formula for profit which is the most important business equation for each and every business makes the world go around.
