2.3.1 Profit Flashcards
What are the 3 types of profit?
- Gross profit
- Operating profit
- Net profit
Definition of gross profit
The difference between revenue/turnover and cost of sales
Definition of operating profit
The difference between gross profit and business overheads
Definition of net profit
The difference between operating profit and interest and exceptional items
How do you calculate gross profit?
Revenue - cost of sales
How do you calculate operating profit?
Gross profit - operating expenses
How do you calculate net profit?
Operating profit - interest (+ exceptional costs)
What is a statement of comprehensive income?
A financial document showing a companies income and expenditure over a particular time period, usually one year
How do you calculate gross profit margin?
Gross profit / revenue X 100
How do you calculate operating profit margin?
Operating profit / revenue X 100
How do you calculate profit for the year margin?
Net profit before tax / revenue x 100
What are four ways to improve profitability?
- Raising prices - If demand is not too responsive to changes in price, then raising prices will generate more revenue for every unit sold.
- Lowering costs - This raises profit margins.
- Buying cheaper resources - Find cheaper supplier. Use cheaper labour by moving overseas.
- Use existing resources more efficiently - Eg introducing new working practices or training staff which raises labour productivity. Upgrading machinery would raise capital productivity. Reduce waste.
What’s the difference between cash and profit?
Cash is the money currently available. Profit is the money left over after all the expenses are paid.
