Income and profit of the company: methods of calculation, indicators, examples

2024 Author: Howard Calhoun | [email protected]. Last modified: 2024-01-02 13:48

Company income and profit maximization are important topics for every businessman. Conducting a correct pricing policy, optimizing their own financial operations are just a few of the opportunities that open up for entrepreneurs in achieving this goal. However, it is impossible to carry out this activity flexibly enough without possessing the appropriate skills and abilities. Therefore, every entrepreneur must know how to calculate such components of the company's budget as costs, income and profit. This will allow him to react sensitively to any financial changes in the company's activities, as well as make more profitable decisions from an economic point of view. This article contains information about the components of the company's budget, how to calculate them, as well as examples of their practical application.

The firm's budget. Income, costs, profits

Income isthe total amount of money received by the organization from the implementation of its own commercial activities for a certain period of time, as well as from its financial transactions. This budget item differs from revenue in that it includes the total finance attracted by the organization (for example, receiving interest on a bank deposit), and not only from direct activities.

The activities of any company also involve costs. Renting premises, purchasing equipment needed to produce a product or provide a service, the cost of a marketing package to attract customers, paying for the efforts of hired personnel - this is a small list of those costs that a company has to make in order to continue to carry out its activities. In another way, they are called costs.

Income and profit of the firm are interrelated items of the budget. The money received by the company is used to pay for various expenses. Thus, profit is the money that remains with the organization minus the costs incurred in the course of activity.

Varieties of income and profits

For the needs of practical activities, entrepreneurs use formulas that go beyond the standard ones. They allow you to collect more information about the organization's budget items, and therefore provide greater flexibility in the implementation of the company's activities.

Thus, the income and profit of the firm are of the following varieties: total, average, marginal. These varieties differfrom each other by way of calculation.

Also, along with these varieties, accounting, economic income and company profits are distinguished.

Calculation of gross income, profit of the organization

Calculation of a firm's gross income and profits gives a general idea of an organization's business results. Formulas are basic for economic activity.

How to calculate the gross income and profit of the firm? The following formulas are used for this. Gross income is calculated as the product of the value at which a unit of a particular product is offered on the market and the quantity in which it was sold to consumers.

D_shaft=PQ;

P – cost;

Q – quantity.

The gross profit of a firm is calculated as the difference between the money earned for a product and its cost.

P_{shaft=Rv – CP;}

Rv – proceeds;

CP – cost price.

Calculate the average income of an organization

In order to calculate the average income of a firm, it is necessary to divide the gross income by the number of goods sold.

D_cf=D_{val / Q;}

D_{shaft – gross income;}

Q - quantity of goods.

This formula is used when the cost of selling products is unstable, changes over a period of time, or the range of goods offered is extensive (which also affects the price). Thus, the average income per unit of production is calculated.

Marginal income of an organization

Marginal revenue is calculated in order to understand what is the maximum amount of funds that can be obtained by increasing the number of goods that are sold at a given price, as well as by changing the price level. For example, how revenue will change when hiring an additional employee and releasing an additional amount of products.

MR=del(TR)/del(Q);

del(TR) – gross income increment;

del(Q) – quantity increment.

The need to calculate the marginal income is that not always an increment in the quantity or value of goods finds an absolutely identical change in revenue. To increase sales by a few units, you have to lower the price.

Calculation of the total profit, income of the organization

Total revenue and profit of the firm are calculated using the following formulas:

P_gen =P_val + P_inv + P _Fin;

P_{inv – return on investment;}

P_{financial – profit from finance.}

Total income is equivalent to gross.

Calculation of economic profit

What is economic profit? This is the part of the cash that remains from the total, earned by the firm after deducting external and internal costs. In another way, this is called economic profit.

The firm's external costs include those costs that the firm incurs when purchasing factors of production that are not its personal property. For example, buying raw materials, advertising, paying employees.

Internal costs of the firm include costs associated with its own property. For example, inventory costs, the amount of money that the entrepreneur did not pay himself for his work, Economic profit is what interests a businessman in a particular field of activity. It is because of her that the manufacturer invests in a particular industry. But its presence also stimulates other market participants to enter into competition.

П_{ek=Rv – Сс – Ic;}

Rv – proceeds;

Cc – external costs;

Ic – internal costs.

Accounting profit of the organization: calculation

Along with the economic profit, the company's accounting profit is also singled out. Its difference lies in the fact that when it is calculated, only external, explicit costs incurred by the company in its activities are used. This is a simplified formula that calculates a positive financial result. Accounting profit allows us to draw a conclusion about the effectiveness of the economic activity of the organization. It indicates to the accountant who keeps count of funds whether it is advisable to change the company's economic policy.

The formula for calculating it is as follows:

P_{boo=Rv – Cc;}

Rv – proceeds;

Сс – external (explicit) costs.

The calculation of this profit is necessary, it is carried out on strict forms and submitted to the tax authorities for reporting.

Other types of income

In activities for calculating the income and profit of the company, along with the already voiced concepts, others are also used. They are needed to maintain better reporting, allow not only to record how much money was received by the organization, but also to separate them by source and other signs that are significant for the company.

It is customary to distinguish between the total amount of funds that was received by any person or organization, and the amount of goods (raw materials) that can be bought with them.

Nominal income thus reflects the total amount of money. The calculation does not take into account the level of prices in the market, taxes and other criteria that are directly related to their value to an organization or individual.

Real income, on the contrary, reflects those goods, resources that a person or company can purchase with the funds that it has. This expresses the true value of the money received.

Separate passive and active income. The criteria for distinguishing them are the actions that must be taken to obtain them.

Thus, passive income is those finances that a person or organization receives regardless of the degree of their participation. An example is the cash received from assets, from investments. Even if a particular person or company ceases to operate, the assets will still continue to generate finance.

An alternative type of income is active. Forto receive it, a person or organization needs to perform specific actions, and if they stop, then the receipt of funds will also stop.

To withdraw funds received not from the sale of goods, but from any third-party actions, a separate concept is used. This is non-operating income. It includes the cash that the company received from financial transactions, investment, revaluation of property. This budget item allows you to understand which channel for obtaining financial assets is more significant - your own activities for the sale of goods or other operations that are not related to sales.

Conclusion

Knowing what types of income and profits form the amount of money received by the company is an important condition for the formation of successful economic activity. The goal of every entrepreneur is to create conditions for the development of his company, which is impossible without financial reporting with clear boundaries between the various items that form its budget.

The article provided information about the types of income and profit of the company, as well as how to calculate them.