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Profit is a positive financial result of company.It means that company has a higher income than the cost of obtaining it. Most commonly it is surplus of sales over the general expenditure. It is considered a remuneration for companies engaging and putting at risk its resources to meet the needs of customers.

Profit does not determine directly the effectiveness of management and investing. It is only the indicator that determine if the business is profitable or not.

Types of profit

  • Gross profit - the difference between net sales and cost of products sold. These costs are variable costs incurred during production cycle. Gross profit shows the contribution of each unit of product sold to the financial result of company.
  • Net profit - a margin from the sale after deduction of discounts, operating costs and taxes. It is the real measure of profitability. Net profit is the surplus that remains after deducting all costs.
  • Capital gain - that increase the value of the capital as a result of increased prices of shares owned by company on the stock exchange,
  • Accounting profit - is equal to the calculated financial result based on profit and loss report.
  • Economic profit - is equal to accounting profit minus the value of the interest of equity, which could be obtained on loan equal to the cost by the average interest rates on loans for the same period,
  • Normal profit - occurs when economic profit is 0 This means that the company does not create real added value
  • Extraordinary gain - arises from events which are difficult to predict, in addition to business and operational activities not related to the general risk.
  • Operating profit - does not include revenues and costs associated with the functioning on money market, extraordinary gains and loses and income taxes.

Normal profit 'is such an amount for profit accounting, which corresponds exactly to the size of hidden costs. We are talking about a normal profit when total income corresponds exactly to the total cost.

Sources of profit

  • Innovation. It can manifest itself in the marketing of new products or improving the previously produced product (product innovation). It can be also modernization of technological processes (technological innovation). Product innovation makes it possible to achieve economic gain by the increase in prices of new products.The technological innovation leads to lower production costs, which at the same level of product prices is a major source of economic gain.
  • Entrepreneurship Taking the initiative, the risks of doing business, the ability to identify and realize profitable opportunities.
  • Monopoly position on the market. The exclusive ownership of some resources of the company, patents, licenses, etc. It gives an opportunity to manipulate the price and ensure fast economic development. State legislation often protect monopolistic companies against competition. It also creates the possibility of obtaining extraordinary profits, not necessarily resulting from the proper management effectiveness.
  • Exploitation of labor force or other production factors. For example, the presence of a large unemployment on labor market favors the exploitation of employees.

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