Firm revenue and profit maximization are important topics for every businessman. Pursuing the right pricing policy and optimizing your own financial transactions are just a few of the opportunities that open up for entrepreneurs to achieve this goal. However, it is impossible to conduct this activity with sufficient flexibility without owning the corresponding skills. Therefore, every entrepreneur should know how to calculate such components of the budget of the company as costs, income and profits. This will allow him to react sensitively to any financial changes in the company’s activities, as well as make decisions that are more profitable from an economic point of view. This article contains information about the components of the budget of the company, how to calculate them, as well as examples of their practical application.
The budget of the company. Income, costs, profits
Income is the aggregate of funds received by an organization from carrying out its own commercial activities for a certain period of time, as well as from financial transactions it performs. This budget item differs from revenue in that it includes the aggregate finances attracted by the organization (for example, obtaining interest on a bank deposit), and not only from direct activities.
The activities of any company are also associated with costs. Rental of premises, purchase of equipment necessary for the production of goods or the provision of services, costs of a marketing mix of actions to attract customers, payment of the efforts of hired personnel is a small list of the costs that a company has to make in order to continue to carry out its activities. They are also called costs.
Income and profits of the company are interrelated budget items. The money received by the company goes to pay for all kinds of costs. Thus, profit is the money that remains with the organization minus the costs incurred in the course of business.
Varieties of income and profit
For the needs of practical activities, entrepreneurs apply formulas that go beyond the standard. They allow you to collect more information about the budget items of the organization, which means to provide greater flexibility in the implementation of the company.
Thus, the income and profits of a company come in the following varieties: general, medium, marginal. These varieties differ from each other by the method of calculation.
Also, along with these varieties distinguish accounting, economic income and profits of the company.
Calculation of gross income, organization profit
The calculation of gross income and profits of the company gives a general idea of the results of the organization's commercial activities. Formulas are basic for economic activity.
How to calculate the gross income and profits of the company? For this, the following formulas apply. Gross income is calculated as the product of the cost at which a unit of a particular product is offered on the market and the amount in which it was sold to consumers.
D shaft = P * Q;
P is the cost;
Q is the quantity.
The gross profit of the company is calculated as the difference between the money earned for the product and its cost.
P shaft = Rv - CP;
Rv - the money earned;
CP - cost.
The calculation of the average income of the organization
In order to calculate the average income of the company, it is necessary to divide the gross income by the amount of goods sold.
D cf = D shaft / Q;
D shaft - gross income;
Q - quantity of goods.
This formula is used when the cost of sales 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 output is calculated.
Organization marginal revenue
Marginal revenue is calculated in order to understand what maximum amount of funds can be obtained by incrementing the number of goods sold at a given price, as well as when the price level changes. For example, how will revenue change when hiring an additional employee and releasing an additional quantity of products.
MR = del (TR) / del (Q);
del (TR) - increment of gross income;
del (Q) - increment of quantity.
The need to calculate marginal revenue lies in the fact that the increment in the quantity or value of a commodity does not always find an absolutely identical change in revenue. To increase sales by several units, you have to lower the price.
Calculation of total profit, organization income
The total income and profit of the company are calculated according to the following formulas:
P total = P shaft + P inv + P fin ;
P inv - return on investment;
P fin - profit from finance.
Total income is the equivalent of gross.
Calculation of economic profit
What is economic profit? This is the part of the cash that remains from the total earned by the company after deducting external and internal costs. In another way, this is called economic profit.
External costs of the company include those expenses incurred by the company when purchasing factors of production that are not its personal property. For example, the purchase of raw materials, advertising, salaries of employees.
The internal costs of the company include the costs associated with its own property. For example, the costs of stocks, the amount of money that the entrepreneur did not pay himself for his work,
Economic profit is what interests a businessman in a specific field of activity. It is because of it that a manufacturer invests in a specific industry. But also its presence encourages other market participants to enter the competition.
P ek = Rv - Cc - Ic;
Rv - the money earned;
Cc - external costs;
Ic - internal costs.
Organization accounting profit: calculation
Along with economic, they also distinguish accounting profit of the company. Its difference is that in its calculation only external, explicit costs that the company incurs in its activities are used. This is a simplified formula that calculates a positive financial result. Accounting profit allows us to conclude about the effectiveness of the economic activity of the organization. She tells the accountant who is calculating whether the change in the economic policy of the company is advisable.
The formula for calculating it is as follows:
P booch = Rv - Cc;
Rv - the money earned;
SS - external (explicit) costs.
The calculation of this profit is necessary, is carried out on forms of a strict sample and transferred to the tax authorities for reporting.
Other types of income
In the activity, along with the already voiced concepts, others are used to calculate the income and profits of the company. They are needed for better reporting, they allow not only to fix 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 on them.
Nominal income, therefore, reflects the total amount of money. The market price level, taxes and other criteria that are directly related to their value for the organization or individual are not taken into account.
Real income, on the contrary, reflects those goods, resources that a person or company will be able to purchase with the funds that it has. Thus, the true value of the money received is expressed.
Allocate passive and active income. The criterion for distinguishing them are the actions that must be performed to obtain them.
Thus, passive income is the finances that a person or organization receives regardless of their degree of participation. An example is the cash received from assets, from investments. Even if a specific person or company ceases to operate, the assets will still continue to bring finances.
An alternative type of income is active. To receive it, a person or organization needs to take specific actions, and if they stop, then the receipt of funds will stop.
To transfer 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 funds that the company received from financial transactions, investment, revaluation of property. This budget item makes it possible to understand which channel for obtaining financial assets is more significant - own activities for the sale of goods or other operations not related to sales.
Conclusion
Knowing which types of income and profit form the amount of cash received by the company is an important condition for the formation of a successful business. The goal of each entrepreneur is to create conditions for the development of his company, which is impossible without the implementation of financial statements with clear boundaries between the various articles that form its budget.
The article provided information on the types of income and profits of the company, as well as how to calculate them.