Gross Profit and Net Profit

Gross Profit and Net Profit

Profit is the difference between the total revenue and total cost of a commercial and industrial concern. In this regard it is important to note that the term total cost includes all expenses incurred in an concern during a given period. These expenses include cost of raw materials, cost of labour, factory expenses, office and administrative expenses, selling and distribution expenses etc. but they do not include the remuneration of labour employed by the entrepreneur in his business, rent of the building owned by the entrepreneur and remuneration of labour employed by the entrepreneur in his business, rent of the building owned by the entrepreneur and interest on the capital employed by the entrepreneur in his business. Hence, from the economic point of view, the difference between total cost and total revenue is called gross profit.

If all these expenses are also deducted from gross profit then the balance is called net profit.

Role of profit

1. According to Peter Drucker, profit mainly fulfills three objectives

2. It is an indicator of the performance of the organization.

3. It is the premium to recover the cost of remaining in the business.

It ensures the supply or reinvestable capital. Profit is not only helpful in checking the efficiency of the business, it also expresses the performance of the management. Profit is the guarantee of the survival of any organization. To survive, it is necessary to get profit at a minimum rate.

Profit can also be seen as a financial means for the future expansion of the organization. Since a part of the profit is also invested for future production, hence it also ensures the supply of capital in future for the organization in a large amount. Then this capital can be used for future expansion, diversification and innovation. Even if the organization is not able to manage finance from internal sources for its expansion and innovation operations, the rate of profit ensures that the organization will get external capital at the minimum cost.

Functions of profit

The basic function of profit motivates the businessman to make the product which is liked by the consumers and for which they can get it at the desired place and time by paying the minimum price. The main functions of profit are as follows-

1. Performance evaluation- Profit shows the effectiveness and good health of the business. High profit means that the business is running successfully. It shows the efficiency of the business and also shows the overall efficiency of the organization.

2. Premium to cover the cost of staying in the business- Profit is the premium which plays an important role in covering the cost to be paid for staying in the business. This cost is in the form of replacement, closure, risk and uncertainty of market and technology. From this point of view it can be argued that in reality there is no such thing as profit. Rather all these are the costs of staying in the business. The management of any business has to earn sufficient profit to pay these costs properly.

3. Ensuring supply for future investment- A part of the profit is reinvested in the business. Thus, profit ensures supply of capital for innovation and future expansion works. It reduces the cost of capital and optimizes the capital structure of the company.

The first goal of any organization is to secure its existence. Apart from this, it also has to grow. Actually, profit is not an end but a means of continuity and growth of the organization.