Profit is a financial indicator of the assessment of the economic activity of a particular enterprise. Profit - the difference between the total revenue received from the sale of products, and the total economic costs of production of these products.
From profit, an increase in the wage fund, financing of measures for the socio-economic and scientific-technical development of the company are carried out. Profit is also an indicator that reflects production efficiency, the quality and volume of production, the level of its cost, the state of labor productivity. In addition, profit has a stimulating effect on the intensification of production, strengthening commercial calculation. Profit is not just a source of ensuring the on-farm needs of the company, but it is also of great importance for the formation of budgetary resources, charitable and extra-budgetary funds.
The desire to make big profits, to strengthen a place in the market, to outperform its competitors are constantly acting motives of entrepreneurial activity, which in turn push the entire economy forward. The expectation of profit encourages entrepreneurs to more rationally use resources and organize production in order to achieve minimum costs. Costs and profits are interconnected. The higher the costs of production and the less efficient the resources used up, the lower the profit. Ultimately, this contributes to better satisfaction of needs and economic growth.
The composition of costs distinguish accounting and economic profit. There are also concepts such as maximum marginal and normal profit.
Under normal profit understand the size of the minimum remuneration for the entrepreneur, who will keep it in the selected industry. In the event that the profit received by the entrepreneur is lower than normal profit, then capital will flow to another sphere. The overflow of capital from a less profitable industry will then lead to an increase in its profitability, in the event that the demand for these goods is constant, then capital of smaller mass will be able to expect a normal profit. If, in this area, entrepreneurs earn more than normal profits, then capital from other, less profitable sectors will rush into this industry. And again, profits will reach normal levels. Normal profit is a certain percentage of capital, which depends on the type of activity.
Also, under normal profit understand the costs of the entrepreneur, which are not included in the costs and are not reflected in accordance with the accounting documentation in entrepreneurial costs, conditionally related to accounting profit. Thus, the normal profit of the entrepreneur is considered as an element of internal costs, that is, as a reward for the functions performed by the entrepreneur. As an example, we can consider a situation where the sole owner of a small company uses only money capital and his own labor. It does not bear the external costs of paying salaries and interest. However, this entrepreneur could put capital in the bank and receive his interest on the deposit. In addition, the entrepreneur, managing his own company, refuses as a result of the earnings that he could receive by offering management services to another company. Normal profit is the minimum fee required to retain cash and entrepreneurial abilities in this firm. If the minimum fee is not provided, then the entrepreneur will have a question about the possible abandonment of this type of activity.