Profit

• profit? 


  money left over after all costs have been accounted for
• gross profit?


  difference between revenue and costs directly related to production
• equation for gross profit?


  revenue - cost of sales
• operating profit?


  difference between gross profit and indirect expenses (salaries + rent)
• equation for operating profit?


  operating profit = gross profit - operating expenses
• net profit?


  difference between operating profit and any interest paid/received + one-off costs
• interest?


  cost of borrowing money and the reward for saving money
• one-off cost?


  exceptional cost (asset or legal fee)
• equation for profit after tax?


  profit after tax = profit for year - tax
• profit margin?


  amount by which sales revenue exceeds costs
• why is higher and increasing profit margin preferable?


  more revenue is converted to profit
• gross profit margin?


  shows proportion of revenue that is turned into gross profit
• equation for gross profit margin?


  gross profit / margin x 100
• operating profit margin?

  shows proportion of revenue that is turned into operating profit
• equation for operating profit margin?


  operating profit margin = operating profit / revenue x 100
• net profit margin?


  shows proportion of revenue that is turned into net profit before tax
• equation for net profit margin?

  profit for the year / revenue x 100
• how to increase profitability:


  • reduces expenses
  • raise prices
  • reduce variable costs
  • reduce one-off costs + interest
• how does increasing prices improve profitability?


  • difference between cost and selling price is greater
  • increasing prices affects demand - price elasticity of demand
  • if demand is price elastic: increasing prices = lower revenue - profitability reduces
  • if demand is price inelastic: increasing prices = higher revenue - profitability increases
• price inelastic?


  demand does not change much if there is a change in price
• price elastic?


  demand changes a lot if there is a change in price
• how does reducing variable costs improve profitability?


  • reduces wastage
  • seek for new suppliers
  • change packaging
  • buy cheaper stock
  • requires storage for stock - reduce impact of cost saving made
  • buying in bulk
  • negotiating with suppliers
• variable costs?


  costs that change as volume changes
• how does reducing expenses improve profitability?


  • seek new suppliers
  • reduce staffing levels
  • replace inefficient fixed assets
  • relocate business
• how does reducing one-off costs + interest improve profitability?


  • restructure borrowing
  • lease fixed assets
  • delay capital spending
  • implement zero budgeting