Compute Your True Profit

Every businessman is constantly looking forward for a profit. They are carefully avoiding their business costs and expenses to exceed their revenues. In finance, profit is what we get after deducting our sales or revenue with our costs and expenses. Sometimes business owners even go beyond ethical grounds just to avoid losses and stay in profit. They do this on many ways. An example of this is by maximizing their revenues by setting unreasonably high product and service prices. Some businessmen manufacture or provide low quality products and services just to lessen their costs. And when it comes to dropping expenses, they commit tax evasions, pay unjustly salaries and benefits to employees, escape environmental preservation expenses, and other unethical and unfair business practices.

Computing profit is one thing that every business owner wants to learn. To know this is to learn some basic accounting. So how do we compute profit? Basic accounting states that profit is equal to revenues less your cost and expenses. For a manufacturing and merchandising firm, net profit is equal to sales less cost of goods sold and expenses. For a service firm, it is equal to sales less cost of services and expenses. Common business expenses include administrative salaries and benefits, provisions, marketing expenses, taxes and licenses, insurance, power and communication, supplies, repairs and maintenance and others. Taxes and licenses are considered government expenses. In a set of financial statements, you will find the computation of your business net profit or net loss in the statement of income or loss. Statement of income is also known as statement of operation.

Business profit is a reward of doing good in business. It is a prize obtained by a good businessman. But why do bad businessmen still getting this reward of profit? Why do their independently and professionally audited and accounted income statements still show profits? Are we having a wrong maxim or a wrong computation? Good businessmen indeed get business reward. Our accounting is not really wrong but only lacking some important factors that need to be accounted. Everything that relates business should be accounted to come out with the true profit.

Let’s go back to the basic equation, net profit is equal to revenues less costs and expenses. Revenues are your total earned sales of products or services. It should also consist of other revenues like interests, income from rents, investments and others. Moreover, it should also include recognizable goodwill like environment protection, charity, full taxes remittance, providing qualitative products and services, satisfaction of clients and customers, high and favorable compensation to laborers and employees, and others. These gains though difficult to monetize are not impossible to estimate in order to be accounted in our statement of net profit or loss.

Costs and expenses, as discussed earlier include cost of products and services and expenses of being in business. Expenses should also include recognizable bad deeds like damaging the environment, tax evasion, providing low quality products and services, customers’ negative claims, absence of honesty and integrity, unfair payment of remunerations to employees, and others. All these factors are business related and therefore should be accounted and recognized in computing true profit. Hence, our accounting standard regulators and bodies should start setting standards that will truly and deeply account business profit. So that, readers of profit statements and all other financial statements will finally be able to know if a certain business or company is doing good or not.