What is profit, what types and how to calculate it – WAU
Profit is the amount resulting from the revenue from a business transaction, subtracting your production costs.
Knowing exactly what profit is has become essential for any entrepreneur and a company that wants to be successful, regardless of their respective area of operation.
Especially because, it is no longer news to anyone that profit is one of the pillars that help any business to survive in a healthy way, much because it is associated with almost all areas of the company.
We can cite the following examples:
- the product area, which will need to help in the pricing of products and services that the business sells;
- the marketing area, regarding the measurement of their actions, which must prove a return on the investment made that is advantageous;
- the financial director who is responsible for paying the business bills and charging for everything to be done for the survival of the company;
- the sales area that will work directly with the marketing of your products.
I can already see that understanding a little more about profit it is essential to ensure that all areas can work in synergy and with the objective of bringing more money to the company, right?
Well, we prepared this post so that you no longer have any doubts about what profit is. Follow along to learn more!
What is profit?
Let’s start by talking a little more about your definition which says that profit is the value resulting from the revenue of a commercial transaction, subtracting its production costs.
In other words, it is nothing more than the monetary amount that represents the difference between the revenues obtained from the sale of some product or service, removing all the costs that were necessary to produce it or buy it to do this. intermediation.
It can also be defined as an economic benefit, which is obtained by an individual or a company, by conducting a financial transaction.
Know that although we use this term a lot these days, its concept is very old. It was created in the 15th century, motivated by the economic practice of mercantilism in Europe.
Well, more than 6 centuries later, the evolution of profit is so evident that we can say that the business world would not exist if it did not exist.
Today we can count on 2 types of profit, the normal and the economic. We’ll talk a little more about them below.
The normal profit is the amount that a company needs to keep its operation running smoothly, in other words, it is the minimum amount necessary for it not to break or go into bankruptcy.
We can even say that if, over time, the company manages to obtain gains above normal profit, it begins to gain market power.
Economic profit, on the other hand, is very similar to what we mentioned in the definition of profit itself. It is the result of the difference between the total revenue that enters the business and all of its costs, including the normal profit that we just talked about.
Know that regardless of whether they are different, both refer to the return on any investment that a company, group of entrepreneurs or person can make.
What is profit margin?
Now that you know more about the definition of what profit is, as well as the types of existing profits, we will present a new concept, which is also linked to the theme: profit margin.
Technically, the profit margin is nothing more than the percentage value added to the total costs of a product or service.
Thus, it is possible to form the final price that this product should be marketed and consequently define the profit, in percentage, that the company will earn when making a sale of this item.
Know that the profit margin is totally related to the pricing of the products themselves and the profitability that is generated for the company, when we talk about the investments that were made to produce or buy them.
You may not have noticed, but the main function of the profit margin is to optimize the sales of the products by calculating the costs that are necessary to produce them together with an increase in the value of these costs.
Thus, it is necessary to build the final price of each product, generating profit for the business. Did you understand how the profit margin is totally related to the profit?
Know that the profit margin is composed of 3 main pillars. See what they are below.
The first of these is the cost itself, which is the amount that was invested to produce or buy the product that will be sold.
In it, several variables can be included, ranging from taxes to spending on freight, staff, among other possible financial expenses.
2. Selling Price
Another component is the Selling Price. Know that it represents one of the most important parts when we are talking about selling a product, as it is he who provides loss or success in the marketing of these products.
The secret to forming a good selling price is to align 2 main points:
- calculation of the cost of purchasing or producing the product itself;
- analysis of how much the consumer is willing to pay for it.
In this way it is possible to set a price that is fair and has a good profit margin for the company, making the commercial transaction an excellent win-win partnership for both sides.
Finally, we have the profit itself, which is nothing more than the percentage that the company will receive upon the sale of the product, as we have said here a few times.
That is, the profit is nothing more than the positive return on investment that was made to make the company’s sales happen.
Know that each sector of the market has a distinct profit margin. Therefore, it is necessary to understand how the dynamics of yours are, in addition to studying the competition very well in order to overcome it in this matter.
The business that manages to unite these 2 points that we commented above, will be able to form prices increasingly closer to the ideal.
How to calculate profit?
Well, we have reached a point where the theoretical part you are already mastering, isn’t it?
So, what do you think about knowing a little more about the practical part? We will teach you how to calculate profit along with some practical examples, okay?
Even because, even though the concept of profit is relatively simple, applying it correctly on paper is not always that easy.
So, let’s start with a simple example and then we’ll show you a little more complete.
Let’s build the first example in the theory that says that profit is the subtraction of the sale price by the costs of its production or purchase.
In practice, if a product was purchased for R $ 500.00 and sold for R $ 800.00, we have a profit of R $ 300.00. Simple, isn’t it?
However, in the vast majority of times, the calculation of profit goes far beyond all this simplicity that we show in this example above. After all, companies need to pay their employees, taxes, rent of real estate, among other expenses that are inherent to any business.
That is, there are many other expenses that go beyond your product cost. Obviously this will end up decreasing the company’s profit a lot, if you choose to calculate it in a simplified way.
That is why, we strongly suggest that the profit calculation be done in a more complete way.
If it were to conceptualize profit following a more coherent thought, it would be what remains of the value practiced in the sale, less the cost of the product together with fixed and variable expenses. Understood?
To make it easier, we will provide your calculation formula with more details:
Profit = Value of sale – cost of production – fixed expenses – variable expenses
Profit = Sales value – (production cost + fixed expenses + variable expenses)
Since fixed expenses are those that will occur frequently, that is, the business will have to pay them every month. Examples of these expenses are: renting your business point, taxes, the cost of the entire team that receives only one fixed salary every month, among other costs.
Variable expenses are those that change every month, that is, they do not have a fixed amount. Examples of these can be: salaries and commissions for the sales team, marketing actions involving paid media, spending on water and energy, as well as the cost of raw materials to produce the products.
So, if a company sells a product for R $ 800, the production cost was R $ 200, moreover, it has a fixed cost of R $ 100 and a variable cost of R $ 50, we have that the profit will be:
Profit = $ 800 – $ 200 – $ 100 – $ 50 = $ 450
Did you understand how this way of calculating informs us a value closer to reality?
know that it is possible to find similar products with different values. The reason for this is that some companies may have more expenses than others or have a higher profit margin!
Now that you know what profit is, see how a sales pipeline can increase your revenue!