Making financial decisions Flashcards
What is profit in a business?
The money left over after all expenses are paid.
What are the two types of costs businesses separate?
Variable costs and fixed costs.
What are the two types of profit businesses can calculate?
Gross profit and net profit.
What is gross profit?
The difference between sales revenue and the cost of sales, ignoring fixed costs.
What is sales revenue?
The money received from selling goods and services.
Why is gross profit useful?
It shows how much profit each product or service generates.
What is the formula for calculating gross profit?
Gross profit = sales revenue − cost of sales.
What is the cost of sales?
The variable costs directly related to production, such as raw materials.
How does gross profit differ from net profit?
Gross profit ignores fixed costs, while net profit includes them.
What does cost of sales include?
Variable costs directly related to making goods or providing services
Why is net profit often considered more important than gross profit?
It includes all fixed costs and other overheads a business has to pay.
What is net profit?
The difference between sales revenue and all costs incurred to make goods or services.
What does a negative net profit indicate?
The business has made a loss because its costs are greater than its sales revenue.
What is the formula for calculating net profit?
Net profit = gross profit − other operating expenses and interest.
What does net profit take into account that gross profit does not?
Fixed costs, overheads, and other operating expenses.
Why are profit calculations alone of limited use?
They need additional context to assess business performance, such as profit margins.
What can comparing gross profit over time show?
Whether products have become more or less profitable.
What does a business learn from the example where gross profit doubled, but sales revenue tripled?
The business might explore why gross profit didn’t grow at the same rate as sales revenue.
What is profit margin?
Profit expressed as a percentage of sales revenue.
What are the two types of profit margin?
Gross profit margin and net profit margin.
What does gross profit margin show?
The percentage of sales revenue left after paying the cost of sales.
What does a gross profit margin of 75% mean?
For every pound of sales, 75 pence is gross profit.
How can a business achieve a higher gross profit margin?
By providing significant added value, such as handmade goods or specialist services.
What is the formula for calculating gross profit margin?
Gross profit margin (%) = (Gross profit ÷ Sales revenue) × 100.
Why might a gross profit margin decrease even if sales revenue increases?
The cost of sales, like raw materials, might have risen faster than the prices charged to customers.
How can businesses respond to a decreasing gross profit margin?
By increasing prices or negotiating lower costs for raw materials.
What is the net profit margin?
The proportion of sales revenue left after all costs have been paid.
What does the net profit margin tell a business?
How much net profit is made for every pound of sales revenue.
What does a net profit margin of 32% mean?
For every pound of sales, 32 pence is net profit.
Why is the net profit margin lower than the gross profit margin?
It accounts for more costs, including fixed costs and overheads.
