Measuring and Increasing Profit Flashcards
Why do businesses work out the percentage increase or decrease in their profits from year to year?
To see how they are performing each year
What do businesses need to do if profits are decreasing?
Investigate why
What is the formula for percentage change in profit?
Current year’s profit - Previous year’s profit divided by previous year’s profit X100
List 4 ways businesses can improve their profits
Increasing prices
Reduce costs of production
Use advertising to increase demand
Improving the quality
What is the disadvantage of increasing prices?
Could mean reduced sales
What is the disadvantage of reducing production costs?
Could lead to a lower quality product
What is a disadvantage of using advertising to increase demand?
Can be expensive and there is no guarantee that profits will increase.
What is the disadvantage of improving the quality?
Could increase costs - they have to be lower than profit
What is gross profit?
The amount left over when the cost of sales is subtracted from sales revenue.
What is cost of sales?
The costs directly related to making the product
How do you calculate gross profit?
Sales revenue - Cost of sales
What is operating profit?
All the revenues and costs from regular trading but not one off events
What does operating profit take into account?
Both the cost of sales and operating expenses
How do you calculate operating profit?
Sales revenue - cost of sales - operating expenses
What is the calculation of profit?
Total revenue - total costs
What is an example of operating expenses?
Admin expenses
What does it mean when a company’s gross profit is increasing but operating profit is decreasing?
The company is not controlling its costs
What is profit for the year?
The profit for the year
What does profit for the year take into account?
Profit or loss even from one-off events
How do you calculate profit for the year?
Operating profit + other profit - net finance costs - tax
What do profit margins show?
How profitable a business or product is
What do profit margins measure?
The relationship between profit made and sales revenue
What is gross profit margin?
Gross profit as a percentage of sales revenue
How do you calculate gross profit margin?
Gross profit divided by sales revenue X100
How can the gross profit Margin be improved?
By increasing prices or reducing direct cost of sales
What is operating profit margin?
Operating profit as a percentage of sales revenue
How do you calculate operating profit margin?
Operating profit divided by sales revenue X100
How can operating profit margin be improved?
By increasing prices or reducing cost of sales or operating expenses
What is profit for the year margin?
Profit for the year as a percentage of sales revenue
How do you calculate profit for the year margin?
Profit for the year divided by sales revenue x100
Why is a good profit for the year good for a business?
Attractive to shareholders - could receive high dividends
