Profitability Flashcards
What is profit?
differance between the revenue of a business and the costs generated by the business during a period of time
How do you calculate profit?
revenue - total costs
What two ways can profit be measured?
- absolute terms
- relative terms
What is absolute terms of measuring profit?
Using volume or a value
EG, £5000 profit in one year
What is relative terms of meausuring profit?
- profit margins, expressed as a %
10% profit margin
WHat are the three differant types of profit?
- net profit
- gross profit
- operating profit
What does cost of sales mean?
variable costs ( raw materials)
What are expenses or overheads ?
fixed costs
How do you calculate gross profit?
revenue - cost of sales
How do you work out operating profit?
gross profit - fixed costs
How do you work out net profit?
operating profit - net finance and tax
Define gross profit?
- raw measure of profit that shows what is left over after taking away the costs directly involved in making a product or providing a service
Define operating profit?
profit generated by the normal operating activities of the businmes
Define net profit?
- shows profit net of all costs
how to work out profit margins ?
- profit / sales revenue x 100
What does the operating profit margin show?
- how effectively a busines turns its sales in profit
- how effectively a business is run
- whether a business is able to add value
WHat five ways can you improve profit?
- increase quantity sold
- increase selling price
- reduce VC per unit
- increase output
- reduce fixed costs
How will increasing quantity sold increase profit and why may it not work?
- higher sales volume, higher revenue
- compeitors are likely to respond
How does increasing selling price lead to higher profit and why may it not work>
- higher selling price, higher profits
- competitors may respond
What are two more complex ways of increasing profit?
- reduce product range
- outsource non essential functions
What is the differance between profit and cashflow?
- profit is deifferance between total revenue and total costs
- cash flow is the differance between total cash inflows and total cash outflows
WHat three ways does cash flow differ from profit?
- timing differances
- way fixed assets are accounted for
- cash flows arising from the way the business is finances
