2.3.1 Profit Flashcards
Profit
The financial gain of a business through the trading and can be found by deducting expenditure from income
Profit = total revenue - total costs
Three types of profit
Gross profit
Operation profit
Net profit
Gross profit formula
Sales revenue - cost of sales
Cost of sales
Are costs that vary with output or level of sales and may include stock
Operating profit formula
Gross profit - expenses (fixed overheads)
Net profit formula
Operating profit - financing costs (interest)
How does the statement of comprehensive income help to measure profitability?
- A profitable business will be able to reward its investors with a return on their investment
- a business that is not profitable will not last long unless drastic changes are made
- helps managers,owners and investors to know how the business is doing by measuring the profitability
Gross profit margin formula
Gross profit/ sales revenue x 100
Operating profit margin formula
Operating profit / sales revenue x 100
Net profit margin formula
Net profit / sales revenue x 100
Ways to improve profitability - increase revenue
Have a sale to reduce the prices
Advertise more
Better distribution may make it more available
Promote products more
Ways to improve profitability - reduce costs
Restructuring, de layering and redundancies
Automating production
make more efficient to reduce costs
Profit what is it?
- Profit is recorded straight away
- A business can trade for many years without profit
- To improve profitability a business must either increase their revenue or reduce their costs
Cash what is it?
- Cash will not be recorded until it is paid out or received which could be in a different trading year
- a profitable business may go bust if it runs out of cash to pay a supplier or wages of staff
- if owners introduce cash via savings or a loan this will not affect the profit figure
