2.3.1 Profit Flashcards
Statement of comprehensive income
-summarises a business’ historic trading activity
(sales revenue) and expenses
- show if made a profit or loss over a time period.
plcs - shows revenue, GP, net profit and OP
Profit
Difference between total revenue and total costs
Why have different kinds of profit
find out where issue is
7 reasons Why does a business need profits
- costs
- dividends
- financial stability
- retained profit
- corporation tax
- performance
- Reward for business owner
Direct costs
Often variable costs
Cost of sales (just stock)
Gross profit
Revenue - costs of sales (cost of goods sold)
Expenses
Overhead or indirect costs all same
Operating profit
Gross profit - fixed overheads
Profit before tax
Operating profit - financing costs
Corporation tax
tax paid by business out of profit
Charged on operating profit as % flat rate
19%
Net profit/ profit for year
Profit before tax -tax + net financing costs
Ratio analysis
- analysing financial performance
- compare 1 piece of accounting info with another
-profitability and liquidity ratios use data from SOCI and SOFP
Why use ratios
compare different years and different companies
assess performance
Profitability ratios
3 considerations
Measure performance a firms efficiency at achieving profit
1-higher % = better
2-relate profit to size of firm
3-nature of business
Gross profit margin
Gross profit divided by sales revenue x100
-ignores overheads, useful to asses control direct costs and ability to max sales
Operating profit margins
Operating profit divided by sales revenue x100
Best method of measuring performance as no control over tax
Should be compared with other competitors in same market and over time
Profit for the year (net profit) margin
Net profit divided by sales revenue x100
4 ways Profitability ratios provide useful insights
1-making profit? profit growing?
2-efficient business revenues -> profit
3-enough to justify investment into business
4-compare with rest of industry
3 ways to increase profits
- sales: increase quantity sold and increase selling price
- reduce variable cost per unit
3.. increase output and reduce FC
all = net profit
10 impacts of increasing quantity sold
1- rev
2-production capacity no FC rise (FC marketing rise)
3-MS
4-elasticity of demand
5-EOS = profit, react to demand
6-sales value fall if price fall = increase sales vol
7-capacity?
8-competitors will respond
9-marketing effects fail e.g promotion doesnt = results
10-differentiate? (reduce sppu)
6 impacts of increasing selling price
4 positives 2 negatives
1-increase rev = add value and reduce COS
2-no need for extra production capacity
3-PED (necessary/loyalty) high quality ?
4-loyal, perceive product good value
1-fall, price rise = a bigger fall in quantity
2-competitor respond - lower prices & customers switch
5 impacts of reduce VCPU
3 positives 2 negatives
1-higher profit margin each item
2-customer don’t notice change in price (quality change)
3-supplier = better prices(EOS) = quality = lower wastage, operations = efficient
1-lower input costs = lower quality inputs = more waste
2-fixed overheads could be still high
4 ways of profit margin improvement and methods:
1-sales value per customer = profitable
2-wastage rates = few quantities, past sell by dates
3-fixed overheads = head office smaller cheaper
4-salary bill= dont replace leaving, remaining work
6 impacts of an increase production output
4 positives 2 negatives
1-greater quality = higher rev
2-maximise share of market demand
3-spread FC
4-extra output = new market, lower price (spare capacity?)
1-perishable = lost rev if not sold (no demand?)
2-production quality compromised = produce more
