Profit

Profit is the main and most important financial indicator of the economic activity of an enterprise.

The efficiency of its work, as well as solvency and liquidity, depend on it. In addition, profit is a source of self-financing for the organization, and significantly influences the pace of modernization and automation of production.

Definition of profit

Any commercial activity is aimed at generating income that largely covers the losses incurred. It is the “net” income received from any type of activity that is called profit. Many people mistakenly believe that revenue equals profit.

Revenue and profit are a significant difference, so you should not equate them to each other.

If we consider a narrow concept, then profit is the difference between the proceeds from the sale of products and the costs incurred for its production and sale. However, in fact, the concept of profit is much broader, since its final result consists of the totality of “net” income from different types of activities. Therefore, all enterprises attach great importance to the profit structure.

Indicator structure

As noted above, the total profit of an organization consists of individual elements.

These include:

profit from the sale of products and services in which production specializes;
profit from the sale of other goods and services that can be obtained as a result of side activities;
results of transactions with fixed assets and other property of the organization;
profit or loss from non-operating activities (results of currency revaluation, transactions with company securities, etc.).

The most important component is profit from core activities, i.e. from the sale of goods and services.

The final result of the activity largely depends on this indicator. This indicator is subject to careful analysis and, as a result, identification of ways to increase it.

Functions

In order to conduct a successful analysis of business activities and better understand the definition of profit, it is important to know the main functions that it performs.

The first thing you should know is that profit characterizes the final result of an activity. Those. in other words, if there is a profit, then this directly indicates the efficiency of the enterprise and its stability, which is its economic essence.
The next function is stimulating. Since profit is the main source of cash injections, the organization is interested in maximizing it. Maximizing “net income” will effectively affect the growth of workers’ wages, the rate of renewal of fixed assets and the introduction of new technologies, as a result of which the level of production will increase, which will have an even greater effect in the end.
The amount of profit plays a significant role not only for the organization itself, but also for the state, since it accounts for the formation of budgets at different levels. Since taxes are paid from profits, they go to the national budget, as well as to local budgets, which contributes to their full formation and use for social needs. This function is called fiscal.
In conditions of market relations, profit can also have an evaluative function, since the size of its value directly proportionally affects the market value of the organization, and, consequently, its competitiveness in a particular industry.
You can also highlight the control function of profit. If it is missing, this means that the company is incurring losses. This signals the immediate need to take measures to optimize the financial situation and reprofile production.

Types and their differences

The final result of financial activity can be of different types, into which it is classified depending on various characteristics.

For example, the sources of its formation are distinguished:

profit from sales,
profit from transactions with securities,
non-operating profit,
profit from investment and financial activities, etc.

You can also structure the concept according to other criteria:

Depending on the calculation method used in organizations. You can find such indicators as marginal, net and gross profit.
By nature of tax payment: distinguish between taxable and non-taxable profits.
To analyze financial activities: use such concepts as profit of previous years, profit of the reporting and planning period, nominal and real profit.
By nature of use: distinguish between capitalized and distributed profits.

Each individual indicator is calculated using a specific formula and is used in each specific document. Therefore, it is important for a good specialist to know all aspects of calculating any type of profit.

Some may argue that income is a type of profit, but this is not true.

Income differs from profit in that it does not include deductions for expenses and expenses of the enterprise.

What does its size depend on?

Profit is a variable quantity, and its size is influenced to one degree or another by various factors. Some of them indirectly reduce or increase the amount of profit, while others directly influence this value.

Factors

All factors influencing changes in profit are usually divided into two main groups: external and internal.

Internal ones are further divided into two subgroups – production and non-production.

The very definition of “production” indicates the influence of precisely those factors that are associated with the production activities of the enterprise. These include the level of technologies used, volumes of products, their quality, qualifications of production personnel, capacity utilization, product turnover, etc.
Non-production factors indirectly affect the final result of the activity, but they also need to be given special attention. These include the level of interaction between the organization’s employees at various levels of the hierarchy, the speed of personnel response to changes in production conditions, the work of the supply and logistics structure, effective management and much more.

External factors that influence the amount of profit include those that are outside of it. They also have an indirect meaning, but can significantly affect the performance of the company.

These include:

demographic situation in the country,
market conditions,
inflation rate and government monetary policy,
tax level,
distance from the necessary raw materials,
level of socio-economic development of the country.

As you can see, the amount of profit depends on a huge number of factors, many of which are completely unpredictable.

Therefore, each organization must conduct a thorough analysis to study the factors, as well as assess the degree of their influence on the final result of the activity.

Artificial measures to increase

The main task of the organization's management is to maximize profits. To do this, it is necessary to develop a set of measures to achieve the greatest efficiency at the lowest cost.

Methods to increase profits include the following:

Optimization of inventory and warehouse balances. It is necessary to analyze the range of products and identify products that are least in demand and take measures to remove them from circulation.
Development of an effective management system that will increase sales volumes. Here, special attention should be paid to segmenting the market depending on the purchasing power of the subjects, which will allow each type of product to be sold in the region where it will be in greatest demand.
Implementation of automated production systems that will help reduce personnel costs, as well as increase productivity and production volume.
Introduction of a waste-free production system.
Analysis of the rationality and efficiency of using the company's funds.

These and many other methods will significantly increase the amount of profit received, as well as improve the important financial indicators of the organization.

How to calculate profit?

Calculation formulas

Let's give an example of calculating different types of profit.

As already noted, the most common indicator is gross profit (GP).

The calculation formula is as follows:

Pv = Vyr – S/s;

Where Vyr– this is revenue from the sale of products, works, services;

S/s– cost of products sold.

Based on gross profit, you can calculate profit from sales (PPr):

Ppr = Pv – Ru – Rk;

Where RU– administrative expenses;

RK– commercial expenses.

The total profit (Po) from all types of activities is calculated as follows:

Po = Pv + Pi + Pf + Pin;

Where Pi, Pf and Pin– profit from investment, financial and other activities.

Taxable profit (Pn) is calculated using the following formula:

Mon = Po – Nn – Plg;

Where Nn- property tax;

Plg– preferential profit.

After paying all taxes and other payments, the company has a net profit at its disposal, which it can spend on its own needs.

Net profit (NP) is calculated using the formula:

PP = Po – Np (+/–) Pd/r;

Where Np– amount of income tax;

Pd/r– other income and expenses.

What does the analysis of the indicator give?

An important step in financial and strategic planning is profit analysis. It is necessary for an objective assessment of the enterprise’s activities, as well as for developing measures to reduce costs, thereby increasing net income. During the analysis, indicators are calculated that are “reference points” for making certain financial decisions.

The most common is factor analysis of profit. It shows what has the greatest impact on the final result. During this process, a multifactor model is compiled, on the basis of which it is calculated how profit will change when exposed to a certain factor.

In any case, profit analysis allows you to develop measures to increase it.

For example, by analyzing sales profits, possible ways to reduce product costs, as well as expand the sales market, are explored, which will increase revenue and, accordingly, net income.

The concept of marginal income is often used for analysis. This indicator reflects the required volume of revenue that will cover all costs, i.e. shows "zero profit".

Based on the marginal income, the break-even point of the enterprise and the possible effect of using financial leverage are calculated.

All data that is necessary for analysis is reflected in accounting in the balance sheet and profit and loss statement.

Accounting aspects of the issue

In accounting, the profits and losses of an enterprise are reflected in a special form “Report on financial results”, Form No. 2. It serves to account for profits from all types of activities, as well as to calculate taxable and net profit remaining at the disposal of the enterprise.

Formation

This is the most important stage of financial planning for an enterprise. It begins from the moment the product is launched into production and ends with the receipt of funds into the company’s account. Here it is important to correctly draw up a balance of the organization’s upcoming income and expenses in order to predict its future work.

At the planning stages, certain conditions must be observed that will allow rational use of funds:

study the need to additionally attract borrowed funds to increase profits;
determine the highest priority areas for the use of financial resources depending on the needs of the organization;
develop effective ways to use capital investments to increase the profitability of production as a whole;
set threshold values for the minimum profit received, which will allow you to quickly respond to any changes in business activity.

Taxation

Article.

Postings

General information about profits or losses received in accounting is reflected in account “99”. Depending on the transactions performed, the data is reflected either as a debit or as a credit to the account. Here are some examples:

Dt 90 – Kt 99 – reflects the amount of profit received based on the results of the main activities of the enterprise;

Dt 91 – Kt 99 – profit received from non-core activities;

Dt 99 – Kt 90/91 – reflects the loss received by the enterprise from the main/non-core activities;

Dt 99 – Kt 94 – write-off of net profit (undistributed) of the reporting period.