13. Profit Flashcards
What is profit?
Money left over after all costs have been met
What is gross profit?
Difference between revenue and turnover and cost of sales
Turnover is also called revenue or sales revenue
Gross profit is also profit made by a business after direct costs have been met
How do you calculate gross profit?
Revenue-cost of sales
Cost of sales: price x quality of sales
What is the cost of sales?
For a retailer/wholesaler: the cost of buying in stock to resell
For a manufacturer: any costs associated directly with the production eg. Raw materials, factory workers wages and any other direct costs
For a supplier of services: any direct costs associated with the service eg. Direct labor
How do you increase profit?
- Adjusting the marketing strategy
- Find new markets
- Diversify
- Merges and takeovers
- Disposable of non profitable activities
How does adjusting the marketing strategy increase profit?
Using marketing techniques to increase its revenue
1. Invest more in advertising
2. Improve customer targeting via social media
3. Accept wide range of payment methods
How does finding new markets increase profit?
Generates more sales
Can sell more by exploiting overseas markets
How does diversifying increase profit?
Extending product lines/producing completely new products to gain more profit/revenue
Eg. Google, globally famous for its search engine is also developing business interest in wearable tech.
How to merges and takeovers increase profit?
Merge with others/ takeover a rival
Means it can grow quickly and lower costs by exploiting economies of scale
Can diversify by acquiring another firm in a completely different field
How does Disposing of non-profitable activities increase profit?
Getting rid of poorer performance parts of their business
Especially if it has a product/division that is making a loss
What is Profit of the year (net profit margin)?
Takes into account all business costs including finance costs, non operating costs
How is net profit margin calculated?
Net profit margin= net profit before tax/revenue x 100
- higher margins usually better than lower ones
- net profit focuses on the ‘bottom line’/‘final results’ in business, it is the very last line in the statement of comprehensive income. It shows the final amount of profit left over for the owner after all deductions have been made.
What is profit of the year (net profit)?
Profit made by a business for the year (total profit)
May be calculated before or after the subtraction of taxation
How is profit of the year/ net profit calculated?
Net profit = operating profit - finance costs (& exceptional costs)
Sometimes net finance costs is the difference between interest paid on loans and interest received by business (from money placed in deposit account)
What is operating profit?
Difference between gross profit and business overheads
Overheads: indirect costs eg. Selling and administrative expenses
How do you calculate operating profit?
Operating profit = gross profit - operating expenses
What is an operating profit margin?
Showing the operating profit made on sales revenue
Used to measure a companies pricing strategy and operating efficiency.
How do you calculate operating profit margin?
Operating profit margin = operating profit/revenue x 100
A high/increasing operating margin is preferred because more money is made on each £1 pound of sales.
Operating income results from ordinary business operations excluding other revenue or losses
What is a gross profit margin?
Shows the gross profit made on sales revenue/turnover
May be increased by raising revenue by raising price or cutting the cost of sales by finding cheaper suppliers
Will vary between different industries, the quicker the turnover of inventory the lower gross margin needed (owner gains less money) eg. Raw materials
Eg. Supermarkets and car retailers. Car retailers have lower sales but gain more profit, opposite for supermarkets.
How is gross profit margin calculated?
Gross profit margin = gross profit/revenue x 100
Higher gross profit margins are usually preferable to lower ones because more gross profit is being made per £ of sales
How is profitability measured?
By calculating profit margins which measure the size of profit in relation to revenue turnover
- gross profit margins
- operating profit margin
- net profit margin (profit of the year)
What is a statement of comprehensive income (profit and loss account)
A financial document showing a company’s income and expenditure over a particular time period usually a financial year
Can be used to calculate gross profit and profit for the year
Shows the figures for the current trading year and the previous year
Allows a comparison to be made between the 2 years
Can show how well a business is performing
How can a business improve profitability
Returns on capital can be increased by making more profit with the same level of investment. This might be achieved by growth funded externally. Means the business increases sales using fresh capital
Increases profit margins with also improve performance. If profit margins can be raised, the business makes more profit at the existing level of sales. (Fresh capital means money from owners. Profit margins can also be improved in 2 ways: raising prices, lowering costs)
What are the advantages of raising prices as a way to increase profitability?
Will get more revenue for every unit sold. If costs remain the same, profitability should improve
