Fictitious profit means something
The difference between sales and profit - this is how you understand commercial terms
When a company generates high sales, that sounds positive at first. But is it enough to survive in the market in the long term? A high turnover does not guarantee a profit. Learn the difference between the two terms.
A company's sales
- Revenue is the amount a company receives for selling its products or services.
- It always results from the normal business activities of a company. This includes, for example, the sales proceeds from the manufactured products in the case of a production company, the income generated with the goods sold in the case of a trading company and the rental income in the case of a housing company. If, for example, a manufacturing company generates income on the financial market, this does not count towards sales.
- The turnover is the calculation basis for the sales tax. As a rule, the term “sales” refers to the net amount that does not include sales tax. This is also included in the profit and loss account.
- You can determine the total sales of a company for a specific period by multiplying the quantities of products or services sold in this period by their respective net sales price and adding these values.
- You can also calculate the sales that the company generates with certain types of products or in individual stores. This may be necessary if, for example, revenue sharing has been agreed. In this context, do not confuse revenue-sharing with profit-sharing, because there are clear differences here.
- With regard to the company's success, sales have only limited informative value, because despite high sales, profit can only be very low or even negative.
The profit as the difference between income and expenses
- The determination of profits not only includes sales, but also all other expenses and income of the company. You can determine the profit for a specific period using the profit and loss account. This is also part of the annual financial statements for the entire financial year. The structure of a profit and loss account follows legal regulations with differences between the individual types of company.
- To determine the total company profit, add to the sales revenues also the income that does not result from the ordinary business activities of the company. In many cases, these come from financial assets and investments. You will also deduct all expenses that the company has incurred in the relevant period. This includes material and personnel costs, but also depreciation and interest for loans taken out.
- This results in the pre-tax profit, which is the basis for calculating income taxes. If these have been deducted from the profit, one speaks of profit after tax.
- A company's profit is usually lower than its turnover. The opposite case can also occur if the company has earned more, for example through investments or financial investments, than with its actual corporate purpose.
- For corporate management purposes, you can also calculate the contribution that certain product types, sub-operations or even individual orders make to the company's profit. There are different methods of cost and performance accounting for this purpose, which compare the sales revenues with the costs incurred.
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