For any entrepreneur, the categories of income and profit are the most significant. Each seller in a competitive market seeks to maximize their cash income and receive a steady income, but how do these two concepts differ and how to learn how to calculate them? You can find the answer to these questions in this article. You can also learn 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 indicated by the word revenue, and the formulas use the designation TR - total revenue, or "total revenue". Income and revenue in the economic sense are synonyms.
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 manufactured products. In economics, this simple formula has the following notation:
Where TR is the total revenue (income), P (from the word price) is the price per unit of goods, and Q (quantaty) is the number of products sold.
For example, if a store produces only one type of smartphone at a price of 999 rubles apiece, 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 is too early to rejoice, because income and profit are different economic concepts.
Company costs
Profit - a definition that is final for the company. Profit is calculated as the final indicator of the profitability of production, whether it is goods or services. Profit can be significantly lower than the number of income. In order to calculate it, it is also necessary to introduce the concept of production costs.
Costs in economic theory are indicated by the English word costs, and for the formulas, a short notation TC (total costs) is used. There are several types of production costs:
- Fix Costs (FC) - fixed (fixed) costs. Such costs may be a permanent rental fee. Fixed costs do not depend on the volume of output of the company.
- Variable Costs (VC) - variable costs. This type of cost varies depending on the volume of output. For example, buying fabrics to create dresses is a variable cost for an atelier.
- The total costs, which consist of fixed and variable costs - TC = FC + VC .
The value of production costs makes it possible to understand how profitable a business is. It is clear that if costs become more than 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 income was presented earlier. Let's try to figure out what profit is.
Economic profit is a value that shows how much money a firm (producer) receives after deducting expenses. Its short designation is π (pi). The profit formula looks like this:
That is, this 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 with tax deduction.
Income and profit - what is the difference? You can understand the answer to this question if you keep in mind two formulas and clearly imagine that the final result of the economic activity of the producer in the market is net profit, and income, in turn, is a concept that contains the value of all produced (sold on the market) ) goods.
What is net profit for?
Two concepts were considered above: income and profit. What is the difference between these two terms, we were able to determine using the above formulas. But an understanding of why net profit is needed is also important for every entrepreneur.
Thus, net profit allows us 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 ahead and make plans for the future development of the company. So, there are several possible ways to get net profit, but the choice is always up to the entrepreneur:
- formation of funds - investments, accumulation, social security and so on;
- receipt of dividends;
- "reserve" capital;
- expansion of the authorized capital (in this case, the net profit should be large).
How to increase net profit
Income and profit - what is the difference? This question is not quite relevant for beginning entrepreneurs. Beginners in small business are more interested in how to increase net profit, being at the starting positions. At the same time, the question of increasing net profit is also of concern to large businessmen, since this process allows expanding the authorized capital. Improving production technologies can be a costly method, however, net profit will be increased due to intensive production development methods.