Small business profit – its types and how to determine it.
After writing several articles on the effectiveness of small business, I received a letter from a reader asking what profit is in business. I believed that this question is so clear that it is not worth talking about it in detail. In addition, I already wrote about profit in several articles, but have not yet written about it in detail. But profit is the main criterion for a successful business. There is profit – the business exists, there is no profit, and the business quickly disappears.
But thinking, I realized that the reader is right. A story about efficiency will not be complete without fundamental definitions of profit. And further, scheduled for writing, articles on the economy of small business will always be based on the concepts of profit. Therefore, although belatedly, this article appeared.
What is revenue. Gross revenue.
I think it is clear to everyone that in order to make a profit, a business must first of all sell goods or services and receive money for it. Those. In business, sales revenue should appear. Revenues are cash flowing into a business over a specific period of time.
Revenue may come from various activities. First of all, revenue from the sale of goods and services produced by the business. Revenues can also come from the implementation by a business of financial activities – investments, interest on bank deposits. The total revenue of a business is the sum of funds received by the business from all types of activity for a certain period. The total revenue of a business is sometimes called gross revenue. Gross revenue takes into account only the flow of money into the business and does not take into account its expenses.
Is it possible to judge by the size of gross revenue the state of small business or to compare businesses among themselves? Of course not. For example, the gross revenue of one business is 1,000,000 cu per month. Is this business good or not? Nobody knows, because we clearly lack information about this business. This indicator does not reflect business performance.
But without this indicator, it is impossible to conduct further calculations on the effectiveness of the business. Therefore, this indicator is always located at the top of all financial reports and all calculations of the financial performance of the business begin with it.
profit_increase_profits I want to make one more small clarification. Many sources consider gross revenue only revenue from direct business activities, i.e. from the sale of goods or services. And all other types of income (for example, from investments, from deposits) are defined as non-functional income. Personally, this approach seems more correct to me. But this difference in definitions does not affect the final results of financial statements.
Gross income (or gross profit) is the income of a business received from the production and (or) sale of products, goods, services. It is defined as the difference between revenue and the cost of production and marketing of products. Typically, gross income can be defined as the difference between revenue and cost of sales for a certain period of time.
VP = B – C
Profit and its types.
So, we moved on to the definition of profit. In the general case, profit is always defined as part of the revenue remaining after reimbursement of expenses for production and (or) sale of products or services. As can be seen from the definition, profit is influenced by absolutely all factors associated with the production and marketing of products.
In turn, profit is one of the main indicators of the small business. There is simply no business without profit. Business exists for profit. The very existence of a business depends on the amount of profit.
What types of profits exist. If you look at various materials on the economy, then in the types of profit and in their definitions, a novice entrepreneur can simply get confused. It is interesting that they are talking about the same types of profit, but the wording for all is different. Therefore, I do not see the point of dwelling on this issue. All these issues can be completely entrusted to an accountant, who must accurately calculate in the reports the profit or loss of the business for a certain period of time. But the businessman is obliged to understand the reports of the accountant and be able to read it.
I knew and I know many businessmen who are not even familiar with the form of such reports. They sign them mechanically, completely trusting the accountant. And they do not know their content at all. The result of these businessmen is usually easily predictable. Their businesses do not last long. Therefore, I recommend that every businessman who does not know how to analyze profit reports, try to make several of these reports in a simplified form yourself and compare them with the accountant’s report. After that, he can easily check and analyze the accounting reports of profit.