The task of each enterprise, whether it be a state organization or a private one, is not only to be profitable, but also to bring a certain income, and the larger it will be, the better, of course. Along with this concept, there is such a term as "profit". This, contrary to popular belief, is something else.
Three main terms
It is quite difficult for a modern person who is far from entrepreneurial activity and has not so rich knowledge in the economy to draw a more or less distinct dividing line between, for example, income, revenue, and the subject discussed in this article.
To facilitate understanding, consider the key differences between these seemingly so similar terms.
Revenue
This concept can be called the most famous and most often (albeit erroneously) used. If to speak as simply as possible, then revenue should be understood as money received by a private entrepreneur or, for example, a state-owned enterprise for a certain product. This does not have to be buy-sell transactions. With the same success, revenue is considered a payment for the services of a manicure or, say, a car wash.
In a word, this is a payment for something, compensation for the declared value. Needless to say, profit is something else?
Income
The term denoting a phenomenon is also very far from the subject considered in this article. If we simplify processes as much as possible and reduce the definition to an acceptable minimum, we can say that income should be understood as the amount by which the capital of an enterprise increases under certain conditions, be it a time frame or, for example, holding some kind of special sale .
Gross profit
Finally, slowly, but surely, we are approaching the subject discussed in this article. Gross profit - this is the very difference between income and expenditure remaining in the balance.
The simplest example in this regard would be selling something. Gross profit in this case will be the difference between the cost of goods and the money earned for it. In the people, by the way, this is most often called an extra charge.
In the case of a full-fledged industrial enterprise, the situation, of course, will be somewhat different, but the principle remains approximately the same. You do not need to be a professional economist in order to understand that you cannot build an Apple-level corporation based solely on such calculations. Gross profit is far from an indicator of the success of an enterprise.
Final version
The previous version of the concept under consideration is, as already mentioned, a kind of margin. This indicator is quite suitable for working with banking systems or, for example, is suitable for searching for potential buyers of shares or patrons. To determine the real financial picture, the gross profit of the enterprise is not suitable. In this case, all required expenses, such as salaries, taxes, or, for example, the purchase of equipment, are not taken into account.
The net profit of the enterprise is that, in essence, it remains in the dry residue after all necessary payments have been made. Only this indicator can demonstrate the real financial picture. This and only in this way determines the appropriateness of certain actions, and the work of the organization as a whole.
What affects the definition of indicators
The net profit of the organization directly depends on a number of factors that every entrepreneur or director of the enterprise should take into account (general director, head of the board of shareholders, etc.).
First of all, this, of course, is a certain amount of tax liabilities. It is on this parameter that a certain percentage of profit is necessarily spent, unless, of course, we are talking about legitimate entrepreneurial activity.
Another parameter, which takes the gross profit of the organization is the size of the cost. Of course, in this case we are talking more about indirect costs however, this should not be forgotten, considering the money earned from a particular transaction.
The greater the cost of goods, the less (in most cases) will be net profit due to a number of conditions. For example, it is largely determined by general market conditions that establish the total value of a product or service. In fact, if the price is too high (higher than the cost of similar, competing goods or services), the goods or service simply will not be sold due to the availability of other, more advantageous offers.
Finally, the last parameter, which naturally follows from the previous two, is the volume of revenue.
Settlement system
In order to find out exactly how much is the net profit and loss, the following series of actions should be carried out:
- To calculate all available production costs. It can be an indicator for a month or, for example, from the moment a company was founded - it all depends on the desired result.
- Calculate the so-called gross income. The calculation scheme in this case is as simple as possible: to determine, it is necessary to subtract from the total revenue the production costs (labor costs, expenses for the purchase of equipment, electricity bills, etc.). At this stage, it is also very important to adequately correlate gross profit and loss, since they constitute a separate, sometimes quite considerable, item of expenses of the enterprise.
- Finally, the last stage of calculations is direct calculation, taking into account the obtained indicators. To obtain the desired result, the gross income should be reduced by the sum of all payments made by the organization for a specific time period. These include all kinds of excise taxes, taxation, other payments to the budget.
Why are these calculations necessary?
The profit and loss statement is prepared primarily for an adequate assessment of the activities of the company, private enterprise or public institution. Having obtained the relevant indicators, it is possible to determine whether the right direction of activity was chosen, what fruits brought certain measures, what percentage of loss the organization suffered, or vice versa - how many times increased assets.
In a word, the calculation of net profit is exactly that action, without which the activity of any of the companies is impossible, since the direction of further actions and the adoption of certain measures depend on the obtained indicators. In addition, any organization, whether it is a state institution or a private enterprise, is part of a larger, more global system, and therefore it is extremely important to have an idea of how expedient the chosen path is as a whole.
