What is profit?

Julia Chmykhalo
Julia Chmykhalo
March 17, 2015
What is profit?

Every entrepreneur knows what profit is, because this is the main goal of all his activities. Profit is the sum of all revenues of any company or enterprise from which all costs and deductions have already been removed. It is worth noting that in economic terms there are many types of profit, but for general use this term means the difference from the revenue received for the implementation of various goods / services and costs that were necessary for the production of goods / services. Costs may include: the cost of purchased raw materials, the depreciation cost of equipment, payment to employees, etc.

It is quite simple to calculate the profit: it is necessary to subtract all costs from the total revenue. Of course, there are many economic formulas that allow you to plan costs and increase profits by optimizing the use of equipment, as well as timely capital investments in the production process.

What is profit and what kinds of it exist?

Profit is the main indicator that is the most accurate characteristic of production efficiency, as well as the quality of products and services provided. It is an indicator of the profitability of the entire business and the possibility of further business continuation.

The dynamics of business development completely depends on its volume, since a certain part of it constantly goes to the development of the company, improving working conditions, encouraging employees and modernizing other factors affecting profits. The second part of the profit goes to improve the welfare of the business owner or company. In some cases, the profit may be charged to the shareholders of the company, who at one time acquired these securities.

Profit performs the following functions:

  • Control, because it is used to assess the economic efficiency of the organization;
  • Stimulating, as it is one of the factors for increasing production, as well as the loyalty and quality of employees;
  • Reproductive, because it is the main indicator of the difference between the costs of the company and its revenues.

In the economy there are many types of profits, among which are:

  • Profit calculated on the basis of the volume of economic costs:
    • Accounting profit is the difference between the company's income and its expenses;
    • Economic profit, which includes the difference in accounting profit and internal expenses of the company;
  • Profit, which is calculated by the end results:
    • Maximum or minimum;
    • Estimated or normal;
    • Negative (loss) or loss of profits.

In addition, any profit depends entirely on how efficiently the company's resources are managed. If an insufficient amount of material resources is invested in the development of a technical base or personnel, then profits may fall.