2.3.1 - Profit Flashcards
Profit - Definition
the surplus (amount) left from revenue after paying all costs
Percentage Change in Profit - Formula
% change in Profit = ((current years profit - previous years profit) / previous years profit) x 100
Gross Profit - What
is the amount left over when the cost of sales is subtracted from total revenue. cost of sales is the costs directly related to making the product e.g. the cost of raw materials
Gross Profit - Formula
gross profit = total revenue - cost of sales
Operating Profit - What
considers both the businesses cost sales and operating expenses. If a businesses’ gross profit is increasing but it’s operating profit is decreasing it usually means the business is not controlling it’s costs
Operating Profit - Formula
operating profit = gross profit / other operating expenses
Profit for the Year (Net Profit) - What
takes into consideration the cost of any interest the business has to pay for borrowing money
Profit for the Year (Net Profit) - Formula
net profit = operating profit / interest
net profit = operating profit + other finance income - finance costs - tax
Statement of Comprehensive Income - What
known as a profit and loss account - shows how much money has been coming into the business (revenue) and how much has been going out (expenses) over a period of time
Statement of Comprehensive Income - Details
- used to assess a businesses financial performance
- covers one whole accounting year, if too short can be misleading
- can contain previous years data for easy comparison
- PLC’s have to publish their accounts
Profitability - Definition
the amount of profit relative to revenue or investment
Profit Margin - Definition
measure the relationship between the profit made and the revenue. they tell what percentage of the selling price of a product is actually profit
Gross Profit Margin - Formula
gross profit margin = (gross profit / revenue) x 100
Operating Profit Margin - Formula
operating profit margin = (operating profit / revenue) x 100
Net Profit Margin - Formula
net profit margin = (net profit / revenue) x 100
Profit Margins - What do they show
- shows growth
- profitability
- highlights areas that need to be improved
Profit Margins - Ways to Improve
+ increase revenue
+ increase prices (if the demand is price inelastic)
+ reducing prices to increase demand (if demand is price elastic)
+ improve product quality, leads to greater sales volume or higher
selling price - lead to an increase in revenue
+ cheaper supplier
+ staff redundancies
- could lead to poor quality goods - reduce sales volume and revenue
+ reduce operating expenses
Profit v.s Cash
profit = the money that a business has left from its revenue once its costs have been payed, profit is not immediate as customers may not pay for their goods straight away or it may have to pay costs straight away
cash = what a business has now to pay its bills, it’s constantly flowing in and out of the business
a business that is making lots of profit may still run out of cash and a business that has lots of cash may still not make a profit
