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To know the benefits of a company it is important to know some accounting tools. In this article, we propose to talk about them in simple language so that, without being an expert, you can put them into practice in your business in a satisfactory way .

Let's see, then, what are business, accounting, gross and net profits, among other points of interest.

What is business profit?

Business profit is a type of accounting profit. That is, we are talking about the resulting product that determines the difference between expenses and income obtained by your business and that in the end ends up being delivered to both you and your partners.

Its definition weights the difference between the profitability resulting from sales, investment and all the expenses, from variable to unavoidable, that every company must make to remain operative.

This procedure depends on the so-called "income statement", which we can define as the record that you are obliged to keep not only to measure the growth and evolution of your business, but also to determine both the health and the accounting profit of a company in a fiscal year.

Certainly, to achieve a better understanding of business profits we have to handle notions such as gross profit and net profit. But first let's look at what profit as such consists of and the types of profit. Specifically, we will refer to the accounting type and the economic type.

What is profit?

Broadly speaking, we understand profit to be everything that can be accounted for as a profit in a specific economic period. Its calculation is the result of the comparison between total costs and total revenues. The greater the gap between your income and your costs, the greater the profit.

Among the costs, you should take into account operating expenses, social charges and disbursements for exceptional reasons. Keep in mind that profit as a book value is not related to the total income of the business, but it is related to the profits of a company .

Accounting profit and economic profit

Within the wide range of financial profits, let's look at the most important types of business profits. These ultimately value your company's business activity.

Keep in mind that, within the study of accounting, accounting profit (also called net profit) relates directly to a company's profit margins. In other words, the accounting profit is obtained by subtracting the income and expenses derived from your business activity. These expenses include those of a variable and fixed nature, i.e., operating expenses and those related to, for example, investments.

It is also important to note that there is a big difference between accounting profit and economic profit. If we ask ourselves what economic profit is, this concept refers to the comparison between the accounting profit of two different fiscal years. For example, if the accounting profit for the year 2020 is, for example, five million pesos, and that of 2021 is seven and a half million pesos, we are talking about a 50% increase in the economic profit between the two periods.

How is a company's profit determined?

As we have said, the company's profit is the product of a simple formula that takes into account both total costs and total revenues. The subtraction of these values determines the real profit of your business through its economic activity.

Let's look at an example: If your company achieves a total turnover of ten million pesos, the investment costs or operating expenses must be subtracted from that total. If these amount to three million pesos, we are talking about a business profit of seven million pesos.

Differences between gross profit and net profit

After explaining what a corporate profit is, what are the types of corporate profits and how they are determined, let's look at the differences between gross profit and net profit:

• Gross profit: Also known as gross margin, it is the record of total sales or revenue minus your company's variable costs. In other words, it is the value resulting from both sales volume and production, from which the total fluctuating expenses must be subtracted. The importance of gross profit lies in the fact that, as a financial instrument, it is taken as a scale to measure the productivity of your company, the dangers of bankruptcy and can influence decision-making that leads to a series of investments aimed at increasing profit.
• Net profit: Known as net margin, it is closely related to the so-called result of the fiscal year. In other words, it is the actual profit of a business in a given period of time. As such, the net profit is useful to know the profitability and how stable your business is financially speaking. Its value is calculated by taking into account the gross profit and fixed expenses, such as staff salaries, debt amortization, operating expenses, etc.

After knowing the differences between gross profit and net profit, let's see what is the exact formula to arrive at them.

• Gross Profit: To calculate the gross margin, it is advisable to follow the following formula: Gross Profit = Total Revenues - Variable Costs

• Net Profit: The net profit calculation is made after obtaining the gross margin. After consolidating this value, the following formula is applied: Net Profit = Gross Profit - Fixed Costs

Before closing with this article, let's take a look at some of the frequently asked questions related to the subject of a company's profits.

Frequently asked questions about a company's profits

In terms of frequently asked questions regarding a company's profits, the following stand out:

What are company profits?

Company profits can be broadly segmented into different branches. As we have seen, there are those of a business nature, accounting, gross profit and net profit.

What are the types of profit?

Although we have focused on business profits and their derivatives, we have pointed out that the types of profit can be divided into accounting and economic ones.

What is an example profit?

Profit, as we know, is tied to earnings in a fiscal year. An example of profit, of course, is the one that determines the profitability of your business: the net profit.

In conclusion, we must insist that these concepts are there to facilitate the measurement of the economic values of your company, but they are not magic formulas to float a business in trouble or to increase the profit margin. Like everything else, a company's profits are obtained thanks to the effort, dedication and hard work on the part of everyone in your business.

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