Measuring And Improving Profit Flashcards
What can profit be used to measure?
Success
What do you have to consider when measuring profit?
Has profit gone up or down? Are there any trends over the past few years? Has the rate of growth of profit altered?
If one business is more profitable than another, how do you know if it’s more successful?
It depends on how many sales are required to make it and how much money had to be invested to obtain the profit requirement
Define profitability
A measure of financial performance that compares a businesses profit to other factors such as revenue
Define profit margin
Ratio with expresses a businesses profit as a percentage of its revenue over a period
Define gross profit
The amount of revenue left over after subtracting direct costs or cost of sale
Formula for gross profit
Sales revenue minus direct cost of sale
Formula for gross profit margin
Gross profit divided by revenue times by 100
Define gross profit margin
Percentage of revenue, that’s actually gross profit
What does gross profit margin to do?
Allow you to compare between businesses and time periods
Doesn’t include overhead ,expenses ,in direct cost eg advertising
What does operating profit mean?
What’s left from revenue after all operating cost of businesses have been deducted for example fixed cost and variable cost – vital as it finances growth
Why is operating profit better than gross profit margin?
It’s a common measure of success and is better than gross profit margin as it includes expenses
Formula for operating profit
Gross profit minus overheads/expenses/indirect cost
Define operating profit margin
Amount of operating profit made on each sale I.E the percentage of revenue that’s operating profit
What’s the formula for operating profit margin?
Operating profit divided by sales revenue times 100
What is the formula of profit for the year margin?
Profit of the year divided by revenue times 100
Define profit for the year
Measure of a businesses profit that taken into account a wider range of expenditures and incomes, including taxation
What is the formula for profit for the year?
Operating profit plus additional income minus taxation
What is GPM likely to like compared to OPM?
GPM will always be higher than OPM as it doesn’t include overheads. GPM and OPM can be the same, but only if there are no indirect costs/overhead.
How does profit of the year margin compare to OPM?
This will always be lower than OPM as taxation is subtracted from operating profit
What are the two major ways to improve profit?
Decrease cost and increase revenue
Describe ways you can decrease costs
Switch to area with lower rent
closed stores with low demand
change supply/renegotiate current supplier
make staff redundant
reduce waste
be more efficient by using better technology
What are ways to increase revenue?
Lower price/increase price (PED)
Sell more (e.g. by adverts or sale promotion )
Add new features to the products,
widen distribution channels
improve physical environment to make store more enticing
What are two ways to increase profit margin
Lower costs
Increase selling price
Define return on investment
Measures the operating profit in relation to the amount of capital invested in the firm
