Profit (2.3.1) Flashcards
What is profit?
the money a business makes after deducting all of its costs from the revenue it earns
Profit
goal is to maximise your profit because it indicates how well your business is doing
if your profit is consistently high it shows that you are managing your expenses effectively and attracting enough customers to generate revenue
if your profit is low or negative (when expenses exceed revenue) it may be a sign that you need to make changes to improve your business financial health
Gross profit equation
GP = revenue - cost of sales
Operating profit equation
OP = GP - operating expenses
Net profit equation
NP = OP - (net interest + exceptional costs)
What is a profit margin?
the amount by which the sales revenue exceeds the costs
Profit margins
can be calculated for each type of profit
can be compared to previous years to better understand performance
higher and increasing profit margins are preferable as it means thatt more revenue is being converted to profit
What is gross profit margin?
shows the percentage of revenue a business retains as gross profit after covering the cost of goods sold
Gross profit margin
reveals how efficiently a company is producing or purchasing the product it sells
provides insight into a company’s ability to generate profit from its core operations
higher GPM suggests that a business is effectively managing its production costs and is more likely to have money left over to cover other expenses and generate net profit
Gross profit margin equation
GPM = (GP/revenue) x 100
What is operating profit margin?
shows the percentage of revenue a business retains as operating profit after covering all operating expenses but before considering interest and tax
Operating profit margin
measures a companys efficiency in managing its day to day operations
provides insights into how effectively a business is generating profit its core operations excluding financial costs like interest and tax
higher operating profit margin suggests that a company is managing its operating expenses well and generating more profit from its primary expenses
Operating profit margin equation
OPM = (OP/revenue) x 100
What is net profit margin?
shows the percentage of revenue a business retains as net profit after covering all expenses including taxes and interest
Net profit margin
provides a comprehensive view of a companys overall profitability
gives insight into how efficiently a business manages all of its expenses including operating costs interest on loans and taxes
higher net profit margin indicates that a company is effectively controlling its costs and generating more profit from its operations
Net profit margin equation
NPM = (NP/revenue) x 100
Improving probability
raising prices
lowering costs
optimising the use of existing resources
Raising prices - improving probability
increasing prices helps a profit margins as when you charge more for what you offer each sale generates more revenue potentially leading to higher profits
Lower prices- improving profitability
lowering operational expenses is an effective method to enhance profitability
lowering costs means you retain a larger portion of your revenue as profit
Use existing resources more efficiently - improving profitability
maximising the productivity of your current resources such as time equipment or staff can significantly impact profitability
means achieving more with the resources you already have without incurring extra expenses
What is profit?
represents the difference between a business revenue and its expenses (which can be non cash) over a specific period
indicator of the business financial performance
What is cash?
the actual money that flows in or out of a business
includes physical currency coins and funds in bank accounts that can be used for transaction
