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Profit

Any manufactured or intended action involves the result, whether it is financial, artistic, social or cogitative activity. The activity of any enterprise means a commercial results – profit of the enterprise. In order to properly available to objectively explain the principle of profit of an enterprise you should first define the notion of profit.

 The profit function

So, according to the dictionary of Economics, profit – is a quality  the positive difference between income from the sale of services or goods, and the costs of their manufacture, and also realization of a prescribed period of time, usually a year. There are many formulas, algorithms and principles of calculation of the profits, but their essence is reduced to one main criterion – determine how much income exceeds expenses. Profit – one of the most important indicators of the functioning of entrepreneurship, and indicates the effectiveness and correctness of its operation.

Types and categories of benefits

Profit, as an economic indicator, is also divided into several main categories: total, or in other words called gross, accounting, or retained earnings; and net other absolute or economic profit. The simplified formula balance profit = revenue – cost of goods or services. While the profit margin = balance-sheet profit – the costs, additional costs (bonus, lost profits and so on), charity. Thanks to the development and evolution of a market economy expanded the concept of profit, and if earlier it was simply the difference between revenues and expenditure, now includes a range of financial phenomena and concepts.

The concept of profit cannot be viewed in isolation. It is closely connected with such indicators as economic efficiency and profitability, which are also linked. Because the profitability of this is the level of economic efficiency, the quality and rationality of application of various resources in the production of goods and services. Profitability ratio is usually expressed in percent. The main functions of profit are the characteristics of the final financial results of the company and the volume of savings, as well as the possibility of financing the social and productive development of the enterprise.

 Types of profit

Now having an idea of profit, we can consider this notion in the specific case of – the profit of the company. Thus, the profit of the enterprise is the amount which would be obtained by deduction from gross income total costs. Not to be confused with the concept of profit income because income is revenue from the sales of products, services or works, excluding material costs and which constitutes a cash equivalent of the products the company, including the profit and wages. While profit – this part of the income from which is already deducted expenses of production and sales.

For more clear and understandable interpretation, you can create a conditional pyramid whose base is revenue from the sale. It includes the cost price, net profit and profit tax. Net profit and profit tax in the total amount of make a profit, and cost includes material costs and labor costs. In turn, the overall rate of remuneration and profit earnings.

Income is a common means of which falls within the enterprise within a certain period of time. These funds after deduction of taxes can be used later on investment or consumption. If the income was subject to taxation, after the deductions for taxes, it is divided into funds for insurance, investment and consumption. The latter is used for remuneration of staff.

The company revenues are also divided into several categories: General (A), medium () and marginal revenue (P). Let's consider them in a conditional dependencies. So, About a=C×K, where C – this is the price of the goods, To   the – total income, which represents the amount received from the sale of a specific quantity of goods or services. With=÷E for O – total income, E – the number of products in units, and With – the average income. Marginal revenue in the most accessible determining this increase in total revenue due to minimum increase in the number of produced and sold goods and services. It gives an opportunity to assess the payback each new additional unit of goods or services.

As has been previously stated, the profit of the company, being a part of the income is divided into conditional group – gross and net. Regardless of the type, the amount of profit is affected by many factors: the quality, relevance, reliability and availability of goods and services that the company offers, the price policy, regional location, market competition, and others. On the other hand, the profit impact on the profitability of the company. Profit from manufactured products, material values and actions not directly related to the operation of the plant(rental income securities) amount to gross profit. It is important to note that the profit is not guaranteed, and is possible only in the case of competent, purposeful and successful conduct of business of the organizer.

Profit from the goods and services produced and their implementation, in other words the profit on primary activity – main kind of profit at any enterprise, which characterizes the success of one or another production strategy at the enterprise. Profits earned from the sale of property, represents income from the sale of funds that are not used or are out of date, as well as assets that relate to tangible and intangible, of surplus raw materials, minus the sum of expenses for their realization. Unrealized profit – income from mutual or equity participations, securities, loans, leases and rents, penalties and interest.

Also according to sources profit of any company is divided into investment, operational and financial. It would seem that these signs duplicate the above mentioned, but there is a certain difference: for example, investment income includes not only the proceeds from vnerealizacionnoy profit, but revenue from the sale of property.

Profit from financial activities requires special attention, because the complicated mechanism of turnover funds, including those attracted from abroad, can positively influence the level of  the investment and operating profit. This happens due to the search for more lucrative than the market average, loan terms, or raising capital on commercially favorable conditions. There also includes income from the use of cash as a Deposit.

Do not forget about taxation, since one of the major sources of money to the state budget of any country are the taxes, including the activities of enterprises. There are taxable and not taxable profit, which is determined by the legislation. From the state point of view of main financial factor is the return before it was accrued tax, as the basis for calculation of taxes on profits.

Optimal distribution of the profits of the enterprise

 That leads to more profit

Net profit which is received by the enterprise, which can be directed on the various items of expenditure: the creation or development of the reserve Fund; payment of dividends; compensation of possible losses; and other payments by the management or shareholders of the enterprise.  is Also possible capitalisation of profits  - increase in working capital. This gives an opportunity to significantly expand functioning of the enterprise's expense, without involving third-party assets and saving money to attract them.

One of the choices for the direction of profit can be the development of social infrastructure of the enterprise or the provision of the social needs of employees and staff. In this case we are talking about the human factor and one of the main assets of the company, as systematic savings  or the withholding of funds for this expenditure can adverse impact on the work process and in the further the profit of the enterprise.

 In the analysis of income is important to take into account the inflation rate, which is equal to the sum of the real profit multiplied by the rate of inflation in a given period of time. Also there is a "Ambassador extraordinary" type of profit, which is characteristic for the countries with high level of development of economy, its sources are non-standard or non-specific objects of purchase for the company, such as its branch.

And the main total of activity of the enterprise – the positive or negative profit loss. The whole complex of measures on development of the enterprise, introduction of innovations, the use of different production systems, technologies of labour may not be justified from the economic point of view, if over a period of time income of the company has negative rate, and there are no prospects to a substantial change in the direction of growth.

But profit, as many economic and financial categories has not only quantitative but also qualitative indicator. According to the three categories above – operating, investing and financing can be traced to analyze the sources and dynamics of profit growth, and thus build, short-term and long-term prospects of development of the enterprise.

Together with this, indicators of profitability of the enterprise sometimes bear and negative implications. After all, frequently with the aim of manipulation and convenience of future economic activity of the enterprise amount of profit is distorted. This can be done as an introduction to the deception of potential investors or shareholders, and tax evasion.

The volume of profit, in General, gives the opportunity to analyze the efficiency of enterprise's activity, prospects of its development, the feasibility of investments in its assets from the outside, as well as the expansion of its potential. But profit is important to analyze not only in General, but every structural element, and its dynamics, as well as its formation according to the main categories, distribution and use of the necessary vectors.

An internal study of profit uses the entire set of indicators, and is typically the company's commercial secret. While the external analysis involves the study of profits outside organizations – the tax inspection, insurance companies, audit firms, banks or credit agencies, on the basis of their reporting and accounting documentation.

Also the analysis of the profit of the scale of the company ’ s full, the structural unit and a separate action or operation.  to identify the weaknesses of the enterprise is possible to conduct a thematic analysis, which examines the specific factor influencing the amount of profit – the tax policy of the company, the principle of bonus payments to employees, capitalisation of profits.

Profit management company

 The scheme of the total profit to payment

But, considering the category of profit, you need to consider not only the sources and types, and control methods for optimizing the production process. For the sound management of profit necessarily need to follow a few rules: involvement in the overall system of the enterprise, an integrated approach to the formation and approval of all decisions about management activities, support for high dynamic control, diversified approaches to the development and implementation of management solutions, targeting the main vectors of development and growth of the enterprise.

The main objective in the management profit – ensure the maximum welfare of the company owners, and at the same time maintain a proper level of provision of the interests of the personnel of the enterprise and the state. This includes the maximum possible size of the profits with the minimal risk for the development of the company, maintain the adequate level of quality of the profit provision of investment capital from the profit growth of the competitive value of the enterprise at the market and formation of optimum volume of material and financial resources.

For optimal and purposeful profit management should be elaborated a strategy, systematization and course of action, which are divided into two main types according to the orientation of management ’ s influence on the formation and the distribution and use. The complex management of the profit is affected by many factors, public regulation, the market system, internal and external mechanisms of the enterprise. For a specific dimension in the process of profit management, as a rule, the use of these types of analysis: horizontal, vertical, integrated, comparative, factor, as well as risk analysis and factors.

Profitability and profit planning

When studying such categories as profit of the enterprise is impossible to forget about such an important factor as profitability, which indicates the efficiency of use of funds and resources of the enterprise. The ratio of profit to average market value of all types of funds and will show the overall profitability of the enterprise. This percentage is based on the ratio of net profit to the amount of capital or turnover, and its purpose is to identify the income obtained by an enterprise from the financial units of trade. Is calculated not only the profitability of the enterprise in General and individually – sales, activities, resources.

But the category of profit is not only manageable, or analysis and planning. This process involved a group of persons, which introduces a certain human factor in all financial settlement procedures. This can result in subjective consideration of all prospects and forecasts. On the other hand, the planning of the different articles and directions in the total amount gives a more realistic picture of the changes in profit in the future. Like most other procedures, planning is carried out in several specific areas: planning profits of the whole enterprise, a separate subsection, or for a particular operation, long-term and short-term planning.

The whole range of procedures that surround such category as the company's profit was primarily aimed at the optimization of this economic phenomenon, increase qualitatively positive indicators, reducing risks associated with its activities and development and increase the well-being of both the owners and the personnel and the state in General. 

Read also: Gross profit as a method to evaluate the efficiency of production - Contribution margin - Inflation - Frictional unemployment