2.3.1 profit Flashcards
three types of profit
gross
operating
net
gross profit formula
sales revenue - cost of sales
operating profit formula
gross profit - other operating expenses
net profit formula
operating profit - interest
what does gross profit say about a business
higher the better
figures can be compared year on year
what does net profit say about a business
higher is better
demonstrates how well a business controls their expenses
statement of profit and loss
statement of the income and expenditure of an organisation
revenue
sales during the period
cost of sales
direct costs of generating revenues.
raw materials, components, goods bought for resale
ratio analysis
analysing relationships between financial data to assess the performance of a business
two types of profitability ratios
gross profit margin
operating profit margin
gross profit margin formula
gross profit / sales revenue x 100
operating profit margin formula
operating profit / sales revenue x 100
administration expenses
operating costs and expenses that are not directly related to producing the goods or services are recorded here
operating profit
records how much profit has been made in total from the trading activities of the business before account is taken of how the business is financed
financial expenses
interest paid on bank and other borrowings.
less income received on cash balances
taxation
an estimate of the amount of corporation tax that is likely to be payable on the profits for the period
net profit margin formula
net profit / sales revenue x 100
increasing revenue to improve profitability
raise prices
may impact sales
demand may fall = depends on elasticity
risky strategy
lowering costs to improve profitability
move production to chin or India
buy cheaper raw materials
upgrade machinery
redundancies
profit
recorded straight away
business can trade for many years without profit.
improving profitability
increase revenue
reduce costs
profit formula
total revenue - total costs
cash
won’t be recorded until it is paid out or received.
profitable business may go bust if they run out of cash
