What Is Profit, Really?
Understanding the difference between daily costs, long-term investments, and how accountants keep things fair.
What Does It Really Mean to Be Profitable?
We all want our business to be profitable — but what does that actually mean?
Profit is what’s left when we subtract all costs from our sales. If costs are higher than sales, we end up with a loss. Companies usually look at this monthly, quarterly, or yearly.
Let’s look at a simple example.
Sue owns a small bakery. She sells cakes that are very popular in her neighborhood. Last month, she sold cakes worth 100 (I am using a fictitious currency here to keep things simple). All the ingredients — like flour, sugar, and eggs — plus the rent for her shop and her own salary added up to 70. That means she made a profit of 30 for the month (100 – 70 = 30).
What Counts as a Cost?
Anything that goes directly into the product is part of the production costs. These are typically referred to as Cost of Goods Sold (COGS) or Cost of Sales. In Sue’s case, that includes the ingredients, but also things like the electricity used to heat the oven.
On top of that, Sue has indirect costs — expenses that are needed to run the business but aren’t directly tied to baking each cake. She pays monthly rent for her shop and occasionally prints flyers to advertise at local events. These are called Operating Expenses, or Opex.
What Happens When Sue Buys a New Oven?
Sue’s old oven broke down unexpectedly, so she had to buy a new one. She wanted something reliable, so she spent 150 on a high-quality oven.
At first, she was worried this meant she’d be making a big loss that month. After all, 150 is more than she usually earns in profit. But that wouldn’t reflect reality — because this new oven will last many years, not just the month it was bought.
She’s absolutely right. That’s why, in accounting, we spread the cost of such long-term investments over the time they’re used. This process is called depreciation.
If the oven is expected to last 10 years, we would show a cost of 15 per year (150 ÷ 10). That way, each year reflects a fair share of the oven’s cost, giving a more accurate view of the bakery’s profitability.
CapEx and Depreciation
The purchase of the oven is considered a Capital Expense (or CapEx) — a one-time investment in something Sue will use over many years.
The yearly slice of the cost (15) is called depreciation. It appears as an expense each year and reduces the reported profit, even though the money was actually spent all at once. This gives a better view of how much it really costs to run the business over time.
A Real-World Example: Starbucks’ Espresso Machines
Big companies make these kinds of investment decisions all the time. Take Starbucks, for example.
When Starbucks upgrades its espresso machines across thousands of stores, it's not just a one-time hit to profits. Each machine might cost several thousand dollars, but instead of showing the full cost in the year of purchase, they spread it out over several years. Why? Because those machines are expected to keep serving coffee for many years.
By depreciating the cost of the machines over their useful life — say 7 years — Starbucks can better match the cost with the revenues they help generate. Just like Sue’s oven, it wouldn’t make sense to show the whole cost at once when the benefit lasts so long.
So whether it’s a local bakery or a global coffee chain, the logic is the same: investments are spread over time to show a clearer picture of true profitability.
