improving profit

• Profitability ratios

  • Gross profit margin

  • Operating profit margin
• GP calculations

  Gross profit = revenue less cost of sales

  Gross margin (%) = gross profit / revenue
• OP calculation

  Operating profit margin (%) = Operating Profit (£) / Total Revenues (£)
• How is OPM useful?

  • How effectively a business turns its sales into profit

  • How efficiently a business is run

  • Whether a business is able to “add value” during the production process (a high margin business must be doing something right!)
• How to Improve Profit

  Increase the Quantity Sold (Higher Sales)

  Increase Selling Prices (Higher Sales)

  Reduce Variable Costs per Unit (Lower Cost of Sales = Higher Gross Margin %)

  Increase Production Output (Spread Fixed Costs over Higher Output)

  Reduce Fixed Costs (Lower Costs = Higher Profit)
• More Complex Approaches to Increasing Profit

  Reduce product range

  Outsource non-essential functions