ShmoopTube

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You need plenty of things to run a successful business: a strong work ethic, skilled employees, [People at a meeting]

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a solid base of consumers...

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…oh, and a good idea's also pretty important.

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After all, it'd probably be pretty hard selling people on skydiving for dogs. [Dog parachuting]

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But even more important than a business that doesn't mix jumping out of planes and pet

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care?

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Profit.

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Profit is the difference between how much money a business earns, and how much it spends. [Coop pointing at a blackboard]

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We can think about this in terms of a simple formula: Total sales – Total expenses = Total

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profit.

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So if you like money—and most business people do—you'll definitely want to keep your total [Woman in a suit jumps into pool full of cash]

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profit high and growing.

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An easy way to understand how profit works is to think about a particular business. [Pete thinking about pizza]

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Let's say our ol' pal Pete Parham dreams of starting a pizza parlor…

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…so one day he gets a loan from the bank…

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…rents a shop, and starts Pete P. Parham's Practically Perfect Pizza Parlor. [Picture of the pizza parlor]

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After his first month, Pete looks at all the money he's made, and wouldn't you know it? [Pile of money]

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It's a grand total of $20,000.

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Does that mean Pete has a profit of twenty grand, and he should take an expensive, pizza-funded [Pete surfing, then he falls off]

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vacation?

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Eh….not so fast.

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Remember, "Total sales – Total expenses = Total profit"…

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…and $20,000 is just Pete's total sales.

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So to figure out his profit, we need to figure out his expenses.

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And also get him a towel.

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No one wants to do math while wet. [Pete walking back onto the beach looking unhappy]

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First, there's that loan.

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He doesn't have to pay it back all at once, but he almost definitely has to pay the bank [Pete walking into the bank]

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something this month.

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Let's say $3,000.

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Next, there's rent.

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His landlord isn't just letting him use the space because he likes the smell of fresh [Pete walking into his landlords office]

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pizza, so that's another $2,000.

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He also has to cover a lot of day-to-day expenses.

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You can't make pizzas out of thin air, so the cost of ingredients might run him around…oh, [Pete paying the guy delivering the ingredients]

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let's say $5,000.

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And last but not least, there are the employees.

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It's pretty much impossible to take orders, make, and deliver pizza all by yourself. [Pete answering the phone in his car]

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Unless you're the Flash, but we're guessing he has better things to do than make pizzas. [Pete delivering pizzas to someones house]

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Either way, that means paying a few employees, which could cost another $5,000.

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Time for some math.

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If we add up all of those expenses, we get a grand total of $15,000.

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Now let's look back at our original formula for profit.

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His total sales were $20,000…

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…and his total expenses were $15,000…

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…leaving him with a total profit of $5,000.

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Not too shabby, but if he wants to go on vacation—and maybe rent a pizza-shaped surfboard—it'd [Pete holding the pizza shaped surfboard]

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probably be a good idea to save up for a few months. [Pete dreaming of his holiday while holding customers pizzas]

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