- What is income?
- Company costs
- Income and profit: what is the difference?
- What is net profit for?
- How to increase net profit
For any entrepreneur, the categories of income and profit are the most significant. Each seller in a competitive market seeks to maximize their cash receipts and receive a steady income, but what is the difference between these two concepts and how to learn to count them? The answer to these questions you can find in this article. You can also read more about the definition of profit and income.
What is income?
Since most of the creators of the theory of economics were English or American, many terms and their designations are usually written in English. Income is denoted by the word revenue, and in the formulas TR is used for total revenue, or "total revenue". Income and revenue are synonymous in the economic sense.
Revenues and profits of the organization are formed in different ways. To calculate the income of the company, you need to multiply the price per unit of output by the number of products. In economics, this simple formula has the following entry:
- TR = P * Q.
Where TR is the total revenue (income), P (from the word price) is the unit price, and Q (quantaty) is the quantity of products sold.
For example, if a store produces only one type of smartphones at a price of 999 rubles per share, then by selling 100 smartphones, it will receive an income of 99, 900 rubles. No matter how significant this number may seem to the manufacturer, it’s too early to rejoice, because income and profit are different economic concepts.
Profit - the definition, which is for the firm final. Profit is calculated as the final indicator of the profitability of production, whether it be goods or services. Profit can be significantly lower than the number of income. In order to calculate it, you must also introduce the concept of production costs.
Costs in economic theory are denoted by the English word costs, and for formulas, a short designation TC (total costs) is used. There are several types of production costs:
- Fix Costs (FC) - fixed (fixed) costs. Such costs can serve as a fixed rent for the premises. Fixed costs do not depend on the volume of production of the company.
- Variable Costs (VC) - variable costs. This type of costs varies depending on the volume of output. For example, the purchase of fabrics to create dresses - variable costs for the company-studio.
- Total costs, which consist of fixed and variable costs - TC = FC + VC .
The value of production costs allows us to understand how profitable a business is. It is clear that if the costs become more income - then the business must be closed.
Income and profit: what is the difference?
Two economic concepts that need further clarification are income and profit. The formula for calculating revenue was presented earlier. Let's try to figure out what is the profit.
Economic profit is a value that shows how much money a company (manufacturer) receives after deducting expenses. Its short designation is π (pi). The profit formula looks like this:
- n = TR - TC .
That is, it is the difference between total income and total costs.
There is a more complex definition in the economy - net profit. The firm’s income can be measured by it, in which case it is calculated as the sum of financial, gross and operating profit minus taxes. That is, again, TR minus tax.
Income and profit - what's the difference? You can understand the answer to this question if you keep two formulas in your mind and clearly understand that the end result of a producer’s economic activity on the market is net profit, and income, in turn, is a concept that contains the value of everything produced (sold on the market). a) goods.
What is net profit for?
Above two concepts were considered: income and profit. What is the difference between these two terms, we were able to determine using the above formulas. But understanding what net profit is for is also important for every entrepreneur.
Thus, the net profit makes it possible to understand whether it is possible to cover the expenses of the current period and use the money received for the development of the enterprise. Net profit allows the manufacturer to always see a few steps forward and make plans for the future development of the company. So, there are several possible ways to get a net profit, but the choice is always behind the entrepreneur:
- the formation of funds - investment, accumulation, social security and so on;
- reserve capital;
- expansion of the share capital (in this case, the net profit should be large).
How to increase net profit
Income and profit - what's the difference? This question seems to start-up entrepreneurs is not entirely relevant. Newbies in small businesses are more interested in how to increase net income while on starting positions. At the same time, the question of increasing net profit is also of concern to large businessmen, since this process allows for the expansion of authorized capital. Improving production technologies can be a costly method, however, the net profit will be increased by intensive production development methods.