Economic profit is what is and what are the criteria for its determination

At the heart of the organization of any enterprise, regardless of the type of its activity is the determination of its economic profit or profitability. These two concepts are often taken for one, so you need to understand exactly what is economic profit and how it relates to profitability. Economic profit is the income of the enterprise, remaining after deducting all costs, including the costs of distributing the owner's capital. Do not confuse the net income with the economic. Simply put, this is the difference between the profitability (that is, the profitability of the enterprise) and the funds invested in the organization.

Let us consider in more detail the economic content of profit or income

Income is the most important economic category and determines the ultimate goal of the activity of any enterprise. In economic terms, profit has the following functions:

• It is an indicator of the activity of any enterprise, organization, firm;
• Stimulation of further investment: if profit is positive, then it is possible to consider options for further financial stimulation of activities aimed at increasing the amount of invested capital and, accordingly, expanding the market and the scale of the enterprise;
• Economic profit is a guarantee of the formation of various kinds of budgets (production equipment, if any, wages, production materials and others).

Economic profit as the correct organization and implementation of a business idea

Economics, finance, enterprise accounting are concepts that are closely interrelated, but at the same time they can give absolutely different values to the activities of an enterprise. Therefore, economic, financial and accounting profit should not be confused . Based on this, several methods for calculating the planned profit can be identified:

• Budget method (or method of direct account);
• Analytical (or method of prospective profit);
• Method of profit planning taking into account the critical volume of sales;
• Aggregate method of calculation.

Economic profit is an indicator that is planned and forecasted initially. Therefore, before you start implementing any business idea, be sure to analyze and calculate all possible risks and projected income.

Clear calculation and planning as important revenue criteria

The economic profit of a firm is not just an ephemeral concept, it is a clear calculation and planning. Before embarking on the implementation of this or that business idea, it is necessary to conduct a number of economic and financial studies: economic analysis of the market, assess the competitiveness of the enterprise, the capacity of production facilities and the quality of the product, its demand by the consumer.

Economic profit is a multifunctional concept, without which it is impossible to determine the feasibility of an enterprise.