Over time, he became my favorite, and biggest, investor. Three months later, he co-led our seed round. It turned out to be Igor Ryabenkiy of Altair capital, a very active early-stage investor. That was enough for him to give me his card and ask me to set up a proper meeting. I gave my quick explainer of what we do and I said, “we’re nearly at positive unit economics.” He pointed inside, smiled, and said “Pitch me.” Just then the elevator arrived and the door opened. “Can I tell you about my startup?” I asked. We nodded at each other and hit the elevator button. As I walked into the lobby, a tall, fit man walked in as well. The diplomat lived on the third floor of a fancy building. A handful of entrepreneurs were invited to meet a handful of investors. It was an evening function at the home of some foreign diplomat. I raised the biggest check for my startup through an elevator pitch. This amount of money is the opportunity cost of your savings, which doesn't matter when computing accounting profit but is essential when working out the economic profit.Photo by Guillaume de Germain on Unsplash The bank provides a 4.5 percent interest rate, compounding monthly, which means that if you leave your money in your savings account, you could earn 4,594 dollars in a year. Let's assume you have 100,000 dollars in your savings account which you can use to set up your ice cream shop. The economic profit, however, considers all opportunity costs, including the implicit costs that don't require an outlay of money.Īn essential implicit cost to consider when setting up a business is the opportunity cost of the financial capital used in an investment. Therefore, accounting profit is the total revenue remaining after deducting the explicit costs of a firm. Accountants work with rough numbers: they take into consideration only the explicit costs. If a company offers you an hourly wage of 300 dollars instead of 100, you may decide not to set up the business and instead continue working as a programmer.Īfter reading the economic profit definition, you may have already guessed what profit means to an economist and what it means to an accountant. It's easy to see how the implicit cost may change your decision about opening your business. Thus, the economic profit definition is the part of the revenue which is greater than the sum of explicit and implicit costs. Therefore, the total cost you need to consider is the sum of your explicit and implicit costs, which is the total opportunity cost, including both the cost of the resource (explicit) and the cost of giving up the best alternative use of the resource (implicit). Therefore, for every hour you work as an ice cream seller, you would give up this 100 dollars of income, which is also part of your cost: it's an implicit cost. ![]() Let's suppose you are also a professional programmer, and your hourly wage at your previous job was 100 dollars. There are, however, other costs that might be less obvious. You can measure these costs, called explicit costs, easily as they take the form of real money. This includes the cost of the ice cream machine, the price of leasing out (or buying) the shop, and the various ingredients you will use. Calculating the total revenue in such a case is relatively simple: you need to multiply the number of ice creams sold by their prices over a given period.Īs you might think, profit is part of the revenue – that is, the revenue that remains after paying out all the costs. Let's consider, for example, you're thinking about setting up an ice cream shop. If you've ever thought about setting up a business, one of the first questions you ask yourself is probably, "What would be my profit?" There are two crucial elements of profit: revenue and cost.
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