2.3.1 Profits Flashcards
Define profits
The surplus of revenue over costs
How do you calculate profit
Total revenue - total costs
What are the 3 types of profit
Gross
Operating
Profit of the year
What document are the three types of profit on
Statement of comprehensive income
Define statement of comprehensive income
A financial document that summarises a business trading activities and expenses to show whether it had made a profit or loss
Define sales revenue
Money coming in from sales
How do you calculate sales revenue
Quantity sold x selling price
Define cost of sales
Costs directly linked to the production of the goods or services sold
Eg raw materials
How do you calculate gross profit
Sales revenue - cost of sales
Define other operating expenses
All other costs associated with the trading of the business
Eg salaries and marking expenditure
How do you calculate operating profit
Gross profit - expenses
How do you calculate profit if the year
Operating profit - interest + taxation
Define intrest and taxation
Intrest paid on debts or received plus tax payables of profit
What is profitability
•Profitability measures the financial performance of a business by comparing profits achieved to a second variable e.g. revenue
What are the three types of profitability ratios
Gross profit margin
Operating profit margin
Profit of the year
Describe gross profit margin
•Gross profit margin (GPM) is a measure of a firm’s profitability by looking at the relationship between gross profit and sales revenue
- If GPM is low or falling this may indicate that a firm
- is not managing its cost of sales effectively e.g. are the cost of raw materials increasing?
How do you calculate gross profit margin
Gross profit / sales revenue x 100
Describe operating profit margin
•Operating profit margin (OPM) is a measure of a firm’s profitability by looking at the relationship between operating profit and sales revenue
- If OPM is low or falling this may indicate that a firm
- is not managing its expenses effectively e.g. wages are increasing or overheads are going up
How do you calculate operating profit sales
Operating sales profit / sales revenue x 100
Describe profit margin of the year
•Profit for the year margin is a measure of a firm’s profitability by looking at the relationship between profit for the year and sales revenue
- If the profit for the year margin is low or falling this may indicate that a firm
- gross profit or operating profit are in decline
- interest rates have changed
How do you calculate profit margin of the year
Profit margin of the year / sales revenue x 100
Methods of improving profits and profitability
- Increasing profitability is often a major aim for growing businesses
- There are several ways in which this can be achieved
- Sell the same quantity but at a higher price
- Sell more at the current price
- Sell the same at the same price but reduce costs
- Businesses are not limited to one of these options but must realise each option has knock on implications
The distinction between cash flow and profit
- Profit exists in financial records when total revenue is greater than total costs
- Cash is the physical existence of money within the business
- Cash flow is the timings of cash flowing in and out of the business
- Profitable businesses can fail because of lack of cash
- Why might cash and profit be different?
- Credit Sales
- Bad debts
- Heavy stock holdings
- Investment in fixed assets
- Seasonality
- Repayment of loans
