2.3.1 Profit Flashcards
What is profit?
Profit is the money left over after all costs have been accounted for
What is gross profit and how is it calculated?
Gross profit is the difference between revenue and the costs directly related to production
GP = revenue – cost of sales
What is operating profit and how is it calculated?
Operating profit is the difference between the gross profit and the indirect expenses involved in operating the business
OP = gross profit – operating expenses
What is net profit and how is it calculated?
Net profit is the difference between the operating profit and any interest paid and received, as well as any one of costs
NP = operating profit – (net interest + exceptional costs)
What is a statement of comprehensive income? (profit & loss account).
The statement of comprehensive income is an end of year financial statement that shows all of a businesses income and expenses over the previous 12 months, the previous years figures are also shown for comparison purposes
What are profit margins?
A profit margin is the amount by which the sales revenue exceeds the cost and profit margins can be compared to previous years to better understand business performance. Higher and increasing profit margins are preferable as it means that more revenue is being converted to profit.
What is the gross profit margin and how is it calculated?
The gross profit margin shows the proportion of revenue that has turned into gross profit and is expressed as a percentage
Gross profit/revenue X 100
What is an operating profit margin and how is it calculated?
The operating profit margin shows the proportion of revenue that has turned into operating profit and is expressed as a percentage
Operating profit/revenue X 100
What is a net profit margin and how is it calculated?
The net profit margin (also known as the profit for the year margin) shows the proportion of revenue that’s turned into net profit before tax and is expressed as a percentage
Profit for the year/revenue X 100
How to improve profitability
- Increase prices.
- Reduce one of costs and interest.
- Lease fixed assets
- Restructure borrowing
- Delay capital spending
- implement zero budgeting - Reduce variable costs.
- Change packaging
- Buy cheaper stock
- Purchase in bulk
- Seek new suppliers - Reduce expenses.
- Seek new suppliers
- reduce staffing levels
- Relocate the business
- Replace inefficient fixed assets
What is the distinction between profit and cash?
- Profit is simply the difference between revenue generated and business costs
- Cash is measured by taking into account the full range of money flowing in and out of a business
