ch 34 Flashcards
profit types
1 gross profit
2 operating profit
3 profit after tax(net profit)
how is profit calculated
total costs subtracted from total revenue
gross profit
is the difference between revenue or turnover and cost of sales
revenue
price*quantity
cost of sales
the direct costs of a business
what is the definition of meant by operating profit?
the difference between gross profit and business overheads, such as selling and administrative expenses
what is the definition of profit for the year or net profit?
the difference between operating profit and interest and exceptional item
op profit cal
gross profit -operating profit
What are some examples of cost of sales?
costs of sales is the direct costs associated with the production of the product or service. that would be raw materials, wages and other costs what you may refer to as variable costs
What is meant by revenue or turnover?
the total income of a business resulting from sales of goods or services
What is gross profit?
gross profit is the measure of how efficiently the business sells it goods and service
you want this to be as high as possible
How do you calculate gross profit?
gross profit = revenue (turnover) - lost of sales
What is operating profit?
operating profit measures how much profit a business makes after all the business’s costs have been deducted
How do you calculate Operating Profit?
Operating profit = Gross Profit - Operating Expenses
what are operating expenses?
operating expenses are the indirect costs of the business
indirect costs are the equivalent of the businesses fixed costs and include expenses such as rent, office, heating and salaries of directors
What is meant by net profit?
bet profit measures the businesses final profit, before any taxes is calculated or dividend paid to shareholders
How do you calculate net profit?
Net Profit = Operating profit - interest and exceptional costs
interest will be the difference between and interest paid by the business (on loans and overdrafts) and interest received (from savings for example)
Exceptional items are large one off items, such as a bad debt
ways to increase profit(ppq)
1-adjust the marketing strategy by
invest in more advertising
new promotional campaign
new distribution channel such as online
accept range of payment types
2-fine new markets
3-diversify
4-mergers and takeovers
5-disposal of non profitable activities
areas that are not making profits
What is meant by statement of comprehensive income/income statement
a financial document showing or company’s income and expenditure over a particular time period, usually one year
what does an income statement include
revenue
cost of sales
gross profit
selling expenses
admin expenses
operating profit
finance costs
net profit
taxation
profit after tax
How do you calculate Gross profit margin?
gross profit expressed as a percentage of revenue/turnover
gross profit margin = gross profit / revenue x 100
in this case the higher the ratio the better, it shows how much gross profit is made for each £1 of sales
how can you improve gross profit margin?
to improve the gross profit margin a business would look to:
increase revenue by increasing the price. if costs stay the same GPM will increase
Reduce costs, Reducing the costs of sales by reducing raw material or utility cost for example would mean an increase in GPM
why will Gross Profit Margin be different in different industries?
as a rule, product with shorter lifespans have a lower GPM, a supermarket for example would make small GPM per item than a car sales dealership however the super market will generate its large profits through sales volume
why might Operating Profit be different in different industries?
differences here are linked to the business’ overheads or fixed costs
manufacturing industries will more likely have high overhead costs than office business due to large machinery costs compared to renting a office and buying a new computer every few years
how do you calculate operating profit margin?
operating profit expressed as a percentage of revenue/turnover
operating profit margin = operating profit/
revenue x 100
the higher the ratio the better. its shoes how much operating profit is mad for each £1 of sales. It shows a good measure of the business’ true trading profitability, before exceptional item are taken off
How do you calculate net profit margin?
net profit before tax, expressed as a percentage of revenue/turnover
net profit margin = net profit/ revenue x 100
-this calculation shows the business’ profitability having taken account of ALL the costs over a course of the year
What is the most basic way of improving profitability?
profit = total revenue - Total Costs
increase revenue
lower costs
How can you increase revenue?
increase price –> PED
Increase value e.g. packaging, customer service –> increases costs?
increase sales –> increase costs?
improving Brand image –> increase costs? not necessarily going to increase sales
Increasing productivity –> reduce staffing, not necessarily increase sales, staffing may want a raise –>increases costs –> staffing, training, machinery
How to reduce costs?
Cheaper costs –> reduce quality, negotiate better pricing with original supplier
Less waste suppliers –> efficiency, buying in bulk may still have extra waste
Reducing packaging –> better for environment, PR, R+D–> new design increases cost
Reduce Storage –> JIT –> not have enough, cant impulse buy, cant handle demand spikes
reduce labour –> reduce morale
reduce wages –> reduces morale
what is amortisation?
the writing off of an intangible asset
what is meant by exceptional costs?
a-one-off costs such as a large bad debt
