2.3.1 Proft Flashcards
Profit
Revenue- costs
Gross profit
Total revenue- cost of sales
Cost of sales
Costa directly associated with making a product, such as materials and cost of running the factory
Operating profit
Gross profit- other operating expenses
Fixed overheads
The costs that have to be paid no matter how well the business is performing, such as management salaries and rent in the head office
Profit for the year (net profit)
Operating - other expenses like tax and interest
Ways to improve profit
Increase revenue, reduce costs HOWEVER BOTH REQUIRE TRADE-OFF e.g. spend more on advertising to increase rev but that means more costs, reducing costs may involve sacrifices on quality or customer service .
Profitability
Profitability states profit as a percentage of sales revenue. Measured as a percentage
Gross profit margin
Gross profit/ sales revenue x 100
Operating profit margin
Op profit/ sales rev x 100
Net
Net/ SR x 100
What does cutting costs depend on
PED
Distinction between cash and profit
Sales revenue does not equal cash inflows. Costs do not equal cash outflows. The simplest way to illustrate is to consider a business that offers credit to
its customers and receives credit from a supplier. Sales revenue is recorded
when a product changes hands, so selling an item on 60 days’ credit
generates sales revenue, but will not lead to a cash inflow for at least
60 days. Likewise, when the business buys materials on credit, the cost is
incurred when the materials are delivered. However, no cash flows out
until the supplier is actually paid, 30 days later.
How are revenues and cash flows different
Revenue is the money a company earns from the sale of its products and services. Cash flow is the net amount of cash being transferred into and out of a company. Revenue provides a measure of the effectiveness of a company’s sales and marketing, whereas cash flow is more of a liquidity indicator.
Distinction cash and profit again
Profit is recorded straight away after a sale, whereas cash inflows and outflows will be recorded after the respective debtor and creditor periods have elapsed, allowing the profit to be realised in cash terms. Therefore a business that is making a profit can fail if they have no cash to pay their debtors.
