# What is Profit and How to Calculate Correctly?

Profit in business is the great dream of any entrepreneur who is starting. That’s because when that financial return finally happens, it means that the company is thriving and will have real chances of surviving and growing healthily in the market. elevagemettey.com has examples

Knowing what profit is and how to calculate it is very important and is part of the efficient management of any business. But still there are many entrepreneurs who confuse concepts related to profit, such as margin, gross profit, operating profit, presumed profit, among others. That’s why we created this content!

In the next few paragraphs you will find valuable definitions and tips that will help you maximize your company’s results. Continue reading and get out all your questions!

## What is Profit?

We can understand the definition of profit as the amount that results from the difference between the revenue generated by the sale of some product – or service – and the value of the cost of producing it. It is the amount that remains for the owner of the company at the end of a stipulated period, that is, the return on what was invested.

If this calculation results in a negative value, it means that the company had a loss with that operation.

## What is the profit of a company?

Knowing the profit of your enterprise is essential not only for the company, but also for the national economy. This is because this value represents a generation of wealth, besides serving to benefit government revenue, the growth of the country and also the generation of jobs.

### How can Profit be calculated?

Although it is a theoretically simple concept, applying it in practice may not be as easy. So, let’s give you all the tips to do it the right way.

Because it is the difference between the sales price and the cost of production, the profit can be represented by the following formula:

INCOME (L) = REVENUE (R) – COST (C)

It could be that simple, could not it? But there is still one important factor that needs to be considered when calculating profit. This factor is the time that, here, can be called exercise . The exercise represents the interval between different calculations of the results of the business.

The maximum period considered by most organizations is one year, but there are companies that conduct this analysis every six months or even quarterly, depending on the amount of movement in the cashier. With this, it is possible to understand and visualize the amount of wealth that has been generated or destroyed by the enterprise.

Although cash flow needs to be taken into account, the amount of the profit is not necessarily the amount left in your cash at the end of the year. The ideal is to determine the change in the value of goods and services.

It is also important to note that each business or branch of the market has a different percentage of profit. Understand and analyze the competition, in addition to knowing very well the whole dynamics of the process.

## Other concepts that involve Profit

In addition to the definition of profit itself, some other concepts linked to profit also need to be understood. We select the most relevant below:

### Profit margin:

Profit Margin represents the percentage value that must be added to the total costs of a product or service. That is, it is the final price by which the same item will be sold.

This percentage, which must be predefined on the basis of costs, time of exercise and other factors, fully influences the final value of the products and the profitability generated by the company.

Therefore, the profit margin is based on 3 main points:

• Cost of production: amount invested in the production or purchase of the item that is sold by the company. They can be considered expenses with raw material, taxes, freight, among others;
• Sales value: The price at which the product or service will be sold determines the success or the loss in the market. It must be fair and at the same time cover production costs and generate a certain percentage of profit. For both sides to win, it is necessary to analyze the cost of production and understand how much the consumer is available to pay for that item;
• Earned Profit: The profit itself is also important in this math, mainly because it will determine the profit margin.

### Accounting Profit or Gross Profit:

Accounting Gains, or simply Gross Profits, represent the value obtained from the sale of a product or services after deducting the explicit costs used to produce or purchase the same. It may be represented by the following formula:

ACCOUNTING PROFIT = REVENUE – EXPLICIT PRODUCTION COSTS

For example, if a cakes house sold \$ 50,000 in sweets within the previously stipulated exercise, but had a cost of \$ 10,000.00 to produce them, the gross profit of that business was \$ 40,000.00 .

### Economic Profit or Net Income or Operating Profit:

Already in the Economic Profit, also known as Net Profit or Operating Profit, in addition to the discounts of the production or purchase, are also deducted the implicit operational, financial and administrative expenses that the company had, such as employee salary, rent, equipment, among others. See the formula below:

ECONOMIC PROFIT = TOTAL REVENUE – (EXPLICIT PRODUCTION COSTS + IMPLIED PRODUCTION COSTS)

Thus, if the same bakery had a further expense of R \$ 15,000.00 with these expenses “indirectly” linked to the product, the net profit it had was R \$ 25,000.00.

### Statement of Income for the Year:

The Statement of Profit for the Year, abbreviated by the acronym DRE, is a very important tool that allows the calculation of the Accounting and Economic Profits of a company.

Represented by a summary of all revenues and all costs and disbursements of the business, the DRE is one of the main statements to analyze the profitability of the enterprise over a certain period of time.

## Presumed Profit vs. Real Profit: What’s the Difference?

There are two other very important concepts about profit that need to be understood by entrepreneurs. In this topic, we will clarify what are the main differences between Presumed Profit and Real Profit. Check out!

### Presumed profit:

Presumed Profit represents a tax regime that calculates the taxes that must be paid by a company – Corporate Income Tax and Social Contribution, for example – based on its presumed profit, not the actual amount calculated.

This modality will be advantageous if the net profit of that business during the fiscal year is greater than the presumed profit table. Thus, the taxes that are to be paid by the entrepreneur will be lower.

In order to be part of this scheme, it is necessary to comply with the specified rules and, for it to be considered advantageous, the company must have a low operating cost.

### Real profit:

In the case of Real Income, taxes and duties – such as Corporate Income Tax and Social Contribution – are collected based on the profit actually recorded by the company.

It may seem simple, but the most appropriate in this case is to have the help of an accountant. This is because, in addition to net income during the period of exercise, some additions, exclusions and comparisons are considered in the Law .

Although not a tax regime that all businesses need to use, in some cases it is mandatory. Among the main examples are companies that:

• had a total revenue greater than R \$ 48 million in the previous year;
• have incomes from outside;
• have benefited from some sort of tax advantage, such as tax exemption;
• opted to make the monthly payment of the Income Tax based on their actual profit;
• such as factoring, credit, financing or investment companies, commercial, investment or development banks, savings banks, securities brokerage firms, securities and foreign exchange companies, leasing companies, private insurance and capitalization companies, private pension funds private, among others.

Now that you’ve got the theory, it’s time to put your hand in the dough and work to make your business profit and grow even more! To guide you in the right way, we separate 8 precious tips. See what they are:

### 1. Pricing your product / service correctly

Not knowing what the ideal value to sell your product / service can greatly reduce a company’s profit margin. The first step is to know all your fixed, operational and administrative costs and, from this information, to find out the minimum price that needs to be charged.

Here it is also very important to analyze how much your customer is willing to pay for that item.

Studying the competition is a basic task for any entrepreneur who is starting a business. Understanding how the market in which you operate works, the quality of the products or services offered, the minimum and maximum value they are charging, among other things, are essential information to support your operational and financial activities.

### 3. Seek to know the needs of your client

In addition to market research, the entrepreneur must also know his target audience very well. You need to analyze your profile, your needs, your financial conditions and your buying behavior. Only then will it be possible to find out how much the customer will be willing to pay for what you are offering him.

### 4. Know offer discounts

Discounts are always well viewed in the eyes of the consumer and, despite the lower value being charged, the volume of sales can grow greatly and provide you with an even higher profit. Enjoy special dates, such as Black Friday , and invest in advantageous promotions for loyal customers .

### 5. Learn to manage your inventory

Believing that by increasing the number of sales you need to keep stock crowded can be a big mistake. That is because, in the event of any unforeseen events, the loss may cancel out all the profit you would have with the merchandise.

Performing a correct and balanced management of your company’s stock is a smart decision and decreases the chances of a sudden loss of money.

### 6. Have a recurring revenue

Reassuring customers and offering them plans or special packages are two great ways to create a recurring revenue for a certain period of time for your company. These practices are very important to supply the periods in which demand is lowest.

### 7. Organize the financial

Knowing how to organize your business financial is the key to getting your bills up to date and profiting more. Sorting and categorizing expenses, revenues, and investments allows you to visualize whether you’re having overspending in any area of ​​your business. If this is happening, you can organize and devise a plan of action to reverse the situation as soon as possible.

### 8. Learn to Metric and Evaluate Results

Although they play a key role in any efficient management, many companies still do not use indicators to measure and measure their results. In addition to contributing to decision making, they can serve as a guideline for areas of the company that are directly related to expenses, revenues, and hence profit generation.

So, did you like this article? We at BizCapital are here to help business owners who want to see their business take off! Keep an eye on our blog and check out other tips on the world of entrepreneurship.