We explain what profit is and its differences with utility and performance. Also, what the loss is and what it consists of.
What is profit?
Gain, benefit or profits are understood to be positive balances obtained from an economic or financial process or activity. The three terms are not exactly synonymous, since they are distinguished in economic or business technical language, but broadly speaking they represent the material or nominal increase in the assets of a company, individual or organization. Gain is the opposite of loss.
Typically, the gain is an indicator of economic growth or value generation in an economic circuit which is not always true in the case of individuals. Its calculation obeys a simple formula:
Total revenue – Production and distribution costs = Profit
Percentage profit margins can be indicative of the lucrativeness of an activity, although they are often used as a symptom of consumption, since capitalists cannot make large profit margins (that is, adding value to the product of which they are intermediaries) if there is no public willing to buy at the price offered. Thus, the profits of an economic activity will grow with demand, and will also decrease with it.
The study of profit margins can be based on two perspectives:
- Macroeconomic It is conceptualized as the level of wealth or progress in the economic activities of a country, measured by Value Added, Gross Value Added and Gross Domestic Product.
- Microeconomic It is conceptualized based on the cost-benefit relationship, as it is a much more individual and minority perspective. This is the case in which the formula detailed above best applies: Total income – costs = profit.
See also: Profitability
Differences between utility, performance and profit
These concepts can often be used more or less synonymously, but they are not in the technical field of accounting. Let's address each one separately to establish the difference:
- Utility It consists of the increase in the total assets of an individual or a company, so it is the remainder after reinvesting production and distribution costs. It is what we commonly call “profit” in non-specialized language.
- Performance. Performance is measured based on the capital invested, since it consists of a percentage or margin of return from the use of a specific asset, such as financial products (shares). It is equivalent to interest earned in common speech.
- Revenue. Finally, profit consists, for accounting, of an additional, extra profit that is obtained under specific and special conditions, such as discounts, surcharges or promotions. Thus, what is normally earned by an economic activity is not, in this specific area of language, revenue but utility.
What is loss?
Loss is the opposite of gain: losses occur when the total wealth of an individual or a company decreases instead of growing. For example, if after selling a series of products that we produce and distribute, we realize that the final amount does not allow us to cover the reinvestment and perpetuate the economic activity over time, we will be facing a loss, since we must add our own pocket the missing if we want to continue in the business, or we must then withdraw from it (bankruptcy).
