Short-Term Profits vs. Long-Term Profits (Plus Benefits)

By Indeed Editorial Team

Published June 22, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Running a business involves recognizing the value of assets and knowing when to invest or sell. In order to understand what an asset is worth, consider learning about short-term and long-term profits. They're both important to the success of a company, though they represent different business strategies. In this article, we discuss what short-term profits are, why they're important and the differences between short-term and long-term profits.

What are short-term profits?

Short-term profits are profits a company makes from the sale of an asset that it's had for one year or less. You can calculate short-term profits by subtracting what you paid for an asset at the beginning of the year and the sale price you received for selling the asset. These assets can be capital assets like stocks, but they can also be inventory, like the amount of product a company invests in producing to sell.

For example, if you invest in 100 units of a product, you can sell those products within a year in order to make short-term profits. If you decide to keep those units for over a year, you can consider the investment to be long term. Long-term investments sometimes depreciate, meaning they decrease in value. Companies often evaluate the risk of asset depreciation when choosing whether to make a short-term or long-term investment.

Related: What Is Profit Margin?

Why are short-term profits important?

Short-term profits can generate liquid capital that companies can use to manage business operations. Liquid capital is the amount of money your company can spend immediately, rather than money that it has invested in long-term assets. By profiting off your short-term investments, you can increase the amount of liquid capital your company has. Here are some additional benefits of generating short-term profits:

Having capital to invest in marketing

If you have liquid capital, you can use it to hire or grow your marketing team. Your marketing team can develop graphics, webpages and social media content to help your company connect with its audience more effectively. You can also use short-term profits to invest in the development of a marketing strategy. Effective marketing can be an important factor in the success of your company. Marketing can also affect:

  • Product development

  • Product design

  • Distribution and sales

  • Package design

  • Advertisement placement and scheduling

  • Target audience

  • Business development

Related: 12 Marketing Tips for Your Marketing Campaign

Managing expenses

In order to compensate their employees and pay monthly bills like rent or utilities, companies typically generate short-term profits. Then they use the capital from those profits to fulfill their financial obligations. Companies with large staffs, offices or distribution channels may need to accumulate higher short-term profits than smaller companies. Managing these costs effectively often helps companies earn higher long-term profits.

Improving credit

A company often requires a good credit score to grow its business. Using liquid capital from short-term profits can help a company paying bills in a timely fashion, which can help improve its credit score. Companies may rely on their credit score when they apply for a business loan from a bank. They may also use their credit scores as a reference when partnering with another company.

Related: 5 Types of Funding for Businesses

Providing flexibility

Earning short-term profits can give a business more flexibility. For example, if a company's distribution process changes due to a rise in demand, it can use liquid capital generated by short-term profits to adjust accordingly. Being able to adapt quickly can help companies adapt to market fluctuations effectively.

Companies can also use this flexibility to take advantage of opportunities. For example, if an essential piece of equipment is suddenly available at a discount, a company that's generated short-term profits might invest in the long-term asset.

Rewarding performance

Businesses can use their short-term profits to reward their employees with cash bonuses. Some retail companies do this during the holiday season because their short-term profits may increase at that time. Regularly rewarding employees can also raise company morale. Additionally, employees may feel motivated to increase their productivity if the company they work for rewards their performance.

Related: Rewarding Employees for Performance

Short-term profits vs. long-term profits

While short-term profit and long-term profit are both equally essential to the overall health and growth of a business, there are a few key differences between them. These differences affect:

Assets

Assets that a company holds for longer than a year differ from assets it sells for short-term profit because long-term assets are more likely to be high-cost investments. For example, a company might invest in long-term assets like property or equipment. In comparison, the same company might consider its office rent a short-term asset if it pays the amount due in advance.

Related: Types of Assets: Definitions and Examples

Taxes

If you hold an asset for longer than a year, the sale of that asset is eligible for capital gains tax. The Internal Revenue Service (IRS) considers short-term profits to be income. To comply with the law, your company can pay a standard income tax rate for short-term profits.

In contrast, the IRS taxes capital gains from the sale of long-term assets at a different rate. This rate is often lower than the income tax rate. Depending on the risk of depreciation, it may be beneficial to keep assets like stocks for over a year in order to qualify for a capital gains tax rate.

Related: Income Tax, Tax Brackets and Deductions Explained

Profitability

Long-term profitability focuses less on asset sales and more on business planning. Since long-term profitability can affect a company's growth, the financial goals of the company are usually a factor when determining long-term profitability. Additionally, a company's investments can also be an indicator of long-term profitability. For example, if a company has invested in equipment and property, it can reduce rental expenses over time, which can ensure long-term profitability.

Sometimes, a company may reduce its short-term profits to increase its long-term profits. While short-term profits are necessary for generating liquid capital, long-term profits can ensure the longevity of a company's success. For example, if a clothing company has excess inventory, it could maximize its short-term profits by lowering prices. In comparison, the same company might choose to maintain higher prices to protect the image of its brand and increase its long-term profits.

Please note that none of the companies mentioned in this article are affiliated with Indeed.

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