Almost everywhere and always, “profit” refers to the difference between the income from the sale of manufactured products and the actual costs of its production. Costs are taxes, various social payments, wages and other payments, including those not originally provided for.
Economic profit is extremely important in a market economy, since it is it that characterizes the performance of enterprises. The constant desire to increase it encourages manufacturers to develop companies, purchase new equipment and hire more qualified and capable employees.
Essence, sources of profit
Oddly enough, even in modern economic theory, experts still have not come to a consensus that there is profit and what are its sources. Previously, many believed that this term should be understood as the difference between the cost of goods on the external and domestic market. The “classics”, on the other hand, assume that economic profit stems solely from the production process, and everything else is mere speculative income. In this case, the profit can also be determined as part of the value added. Modern economists believe that profit means:
- First things first, this is any income that is obtained by using various factors of production. By this is meant not only labor, but also land, as well as entrepreneurial activity.
- Secondly, economic profit may be a kind of reward for an entrepreneur who, for one reason or another, is forced to conduct his activities in conditions of imperfect competition. It is known that in this case, all entrepreneurship is associated with a high risk of bankruptcy or other adverse events in the external environment.
- Thirdly, it can be considered from the point of view of the same remuneration that a single individual entrepreneur or an entire company receives as a result of successful implementation of new technologies or equipment in production, which helps to get more profit at lower cost.
- Fourthly, there is also a monopolistic way of making profits. A company that first appeared on a market can immediately acquire or register patents, when using which other firms or entrepreneurs are forced to pay a certain percentage.
Important profit features
So what is economic profit? The profit functions quite fully reveal this question:
- Accounting.
- Dispensing.
- Stimulating.
What is the essence of the accounting function? As we have already said, it is economic profit that is the main tool to help determine the actual effectiveness of the enterprise. In general, all this is revealed by determining profitability.
As for the stimulating role, it is profit that is the main factor that pushes companies to accelerate development. In general, almost all innovations are introduced in production precisely for this reason. In this case, the price level, level of profitability and labor productivity are extremely important. What other functions of economic profit exist?
Distributive role - the concept is more vague, as it develops immediately from two “bases”:
- Source of savings, a means for further development and modernization of production.
- “Baggage” of accumulation, the basis for material incentives for company employees.
Ambiguity of the concept
As we have repeatedly emphasized, in a modern market economy, profit as an economic category is considered as the basis for the development of any company. At the same time, this concept is extremely ambiguous, and in some cases is also vague. We considered income in the sense that it is a fundamental factor in any production. It is profit that is the “anchor” that, in principle, keeps the entrepreneur in the economic niche he has chosen. Therefore, the funds received can be considered from the point of view of the “return” from the money invested in the production. So that normal profit with good reason, it can be considered as an integral part of the costs.
Let's look at the simplest scheme, which is considered in almost all modern economic textbooks. Total income is divided into costs and profits. In turn, losses are divided into the following categories:
- Permanent.
- Variables
- A separate group is the cost of the economic type, which includes both categories considered by us.
Profit is divided into normal and economic. In turn, the first category can be divided into:
- Net entrepreneurial income.
- Percentage (return) from capital invested in the business.
Quantification of income
As we have already said, in quantitative terms, income is defined as the difference between the funds received and various types of losses. But, as you know, costs can also be considered from different points of view, and therefore profit should (at least) be divided into two concepts: economic and accounting. In standard economic theory, profit is the difference between gross income and gross loss. In this case, absolutely all categories of costs should be deducted from income, including those that were not implied by the initial business plan.
Once again about losses
For example, what does an entrepreneur complaining about “barely covered costs” say? He implies that the profit received by his company is barely enough to level the difference between losses and profit, and the remaining amount to a minimum justifies the continuation of activities in the chosen direction of activity. Any normal commercial organization or individual entrepreneur strives to make this difference as large as possible. This balance is profit (including an economic category).
It should be remembered that from this point of view, profit is in no way part of the loss, as it is part of the funds received in excess of normal income. We have already mentioned that economic effect profit is the anchor that keeps the entrepreneur from the possible cessation of production activities. This is a payment for the risk and uncertainty that accompany every businessman on a daily basis. It should also be remembered that these factors are often generated by the external environment of the economy, and therefore it is almost impossible to predict and avoid them.
Of course, the results of innovations and entrepreneurial entrepreneurship should also not be discounted. In some cases, the prevailing role is played by the already mentioned monopoly position of the company. Net economic profit is then obtained very simply: the company simply limits the production of products, while stimulating increased demand, simultaneously raising prices. This is a monopoly profit. Of course, the FAS is struggling with such phenomena, but many manufacturers are still not shy about using their dominant position in the market.
Accounting variety
Profit may also refer to the difference between external costs and total income company. This is an accounting interpretation of this concept. This kind of “accounting” is due to the fact that only those nuances that are reflected in external incoming documents are taken into account in the form of losses.Because of this, this type of profit may not coincide at all with the economic one. Simply put, accounting profit does not take into account the amount of internal costs of the company.
Internal costs
The sum of external and internal costs - this is the circumstance that greatly divides entrepreneurial income. Both economic profit and its accounting variety take into account these factors, but not in equal volume.
As we have already noted, part of domestic expenses is normal profit. This is the usual, sufficient remuneration of the entrepreneur for all the risks of possible losses that he may well incur. If this condition is not fulfilled, the businessman simply refocuses his efforts on another direction, which is more profitable for him, or even abandons his own business and leaves for a solid salary to some employer. It is important to understand that when the amount of economic profit is small, a person can receive income from entrepreneurial activity, but these funds are so small that they do not support interest and continue to do their own thing. To make it clearer, we give a simple example.
Practical example
Consider the economic costs and profits in the aspect of managing a hypothetical IP. For example, an entrepreneur spends about 100 thousand rubles a year to buy all the necessary factors of production. This amount can be considered the total external costs. But if a businessman placed these funds in a bank, he could have received a net income of at least 5 thousand per year, and at current rates - even more. In this case, internal costs - five thousand rubles, and external - 105 thousand.
Thus, economic profit is equal to real profit only if the businessman managed to earn significantly more than 105 thousand. If the net revenue is 105 thousand, then in the "offset" of the accounting profit, you can write five thousand. Economic profit will be zero. In the case, if we assume that the entrepreneur could work for a third-party employer, instead of doing his own thing, then it can be completely negative.
It is easy to understand that in this case a person is unlikely to continue to conduct his own business, as he has a simpler and more unhindered way to get the same income. That is why a profit of 5 thousand can be considered as "normal", but it still will not stimulate the businessman in this case.
From this example, it is clear that income and economic profit are close concepts, but by no means identical. The fact is that when receiving "income", an entrepreneur can very easily make ends meet. If he does not have prospects, or if he does not come up with ways to reduce costs, he will obviously have to leave the chosen field of activity. In the case when a businessman makes economic profit, this indicates the correct use of his resources by him.
The most favorable situation for the entrepreneur
In any case, until the income significantly exceeds the sum of the total costs, the prospects for the business will be rather vague. Only when the amount of costs will be insignificant, in comparison with the income received, the profit will fully fulfill its stimulating function.
Of course, the entrepreneur in this case is unlikely to leave the industry, since his profit will be very large. Thus, we once again came to the expected and logical conclusion: the concept of economic profit provides for its significant dominance over normal profit. Alas, in reality, everything is not so rosy, as such monopolistic organizations often receive such incomes, which actually have no need to improve their macroeconomic indicators.
Some calculation methods
In the practice of domestic farms, “profit” is considered only from the point of view of net gross income and reflects the real effectiveness of market management. It also reflects the effectiveness of investing in labor and capital goods. In our country, microeconomics (economic and accounting profits are also taken into account by it, but not to that extent) most often implies a very simple way of calculating profit: by determining the difference between gross income and costs. If you carefully read all of the above, then the inappropriateness of this approach is obvious, because it does not take into account many factors.
This is very beneficial for various "statistical" organizations, since such a calculus allows you to draw "beautiful" graphs of success in the economic process, but this does not at all reflect the real state of affairs. To more realistic assess the current situation, it is better to use a slightly different way of accounting. So how to calculate the economic profit?
In this case, by this concept we mean the income that the organization received as a result of its business activities. This is the gain from the sale of goods or services, from the sale of material assets or other assets of the enterprise, reduced by the amount calculated by this formula:
PV = PRP + PRF + PVN
What is what in this equation? Consider:
- PV - balance sheet profit.
- PRP - income from the sale of those products or services the organization is engaged in providing.
- PRF - funds received from the sale of tangible assets of the company.
- PVN - other income that a businessman or enterprise received as a result of non-sales activities.
It should be remembered that net realized profit should be calculated as the difference between the proceeds from the sale of products or services minus all tax deductions and other obligatory payments, which in this case are understood as the “expenses” of the enterprise. The calculation is carried out according to the following scheme:
PRP = VO - VAT - A - I
The following categories are used here:
- IN - gross profit from the sale of goods or services.
- VAT - relevant tax (value added).
- BUT - excise payments.
- AND - the costs of both direct production and the sale of goods or any services.
Features income from the sale of company funds
It is important to consider that the economic analysis of the profit received as a result of the sale of some valuable assets of an organization must take into account some important points. More precisely, there is one peculiarity: it is necessary to calculate this value in the form of the difference between the initial value of the property put up for sale and its actual selling price. At the same time, one should not forget to adjust the value, taking into account also the inflation index registered at a particular moment in the state.
What is meant by non-operating operations?
We have already mentioned the role of non-operating activities. But what income can be attributed to the profit that is received as a result of their holding? Let's give their main list, which is considered in all modern financial institutions:
- receipt of dividends from the transfer of their property for rent or other form of use in relation to other enterprises;
- any receipt of interest or loan payments from the debtors of the company;
- Profit received as a result of operations based on the difference in the exchange rates of foreign and domestic currencies.
Of course, in this case, similar costs are possible.
For example, these are net losses for those previously executed orders, which for some reason were subsequently canceled by the customer himself. This also includes losses incurred by the company due to the need to preserve part of its production capacity (or all), as well as due to downtime.Losses can also occur as a result of markdowns of batches of products, as well as due to the need for judicial settlement of various disputes and conflicts with third parties. This also includes all fines and penalties paid to creditors or business partners (due to failure to fulfill their obligations under the agreements). Finally, operations on differences in exchange rates can also lead to serious losses.
findings
So we learned what economic profit is. Profit functions are extremely important. We have repeatedly mentioned that it is she who is the basis of the entire modern market economy. If there is no income, or if it is so small that it can be considered formal, the business (especially small) stagnates due to the outflow of businessmen to other industries or their transition to employment. All this causes dire consequences for the state budget, as private business pays a considerable amount of taxes.
Finally, the basic economic content of the profit provides for the possibility of a simple analysis, from the results of which one can easily judge the effectiveness of a particular enterprise, the feasibility of allocating state subsidies and grants to it.
It is important to consider that income should be considered according to the most critical approach. The mere fact of having a profit does not mean anything at all. Winning reports on the success of small businesses, for example, remain only a “paper victory” in most cases, since they mean only getting a normal income. We said that this value is too small to stimulate the development of business in the state and in the world.
