2.3.1 business failure

• Profit


  a financial gain/surplus between the revenue and the cost.
• Gross profit


  This is the type of profit where it comes from revenue/sales

  
  

  Gross profit = Revenue − Cost
• Gross profit margin


  It looks at the relationship between the gross profit and the revenue

  
  

  Gross profit margin = Gross profit / Revenue x 100
• Operating profit


  This is the type of profit where it is the gross profit minus the operating expenses.

  
  

  Operating profit = Gross profit − Operating Expenses
• Operating profit margin


  It looks at the relationship between the operating profit and the revenue.

  
  

  Operating profit margin = Operating profit /Revenue x 100
• Profit for the year/net profit

  This is the type of profit where it is the operating profit minus interest/tax.

  
  

  Net profit = Operating profit − Interest or Tax
• Profit for the year/net profit margin

  It looks at the relationship between the net profit and the revenue.

  
  

  Net profit margin = Net profit/Revenue x 100
• How to improve profitability

  • Reduce costs:

  ○ This will reduce the amount of expenses that the business spends on.

  ○ However, there would not be enough sales to sell to consumers.

  • Increase sales:

  ○ By using this, it can generate revenue for the business.

  ○ However, the cost will be high as they need to produce more output.

  • Increase prices:

  ○ By doing this, it will increase revenue which will be generated into the business.

  ○ However, there will be less consumers as they prefer low-priced products.
• Statement of comprehensive income

  - A formal financial document which summarises trading activities and expenses

  - This is shown over a time period and it always show the current and previous year.
• Distinction between cash and profit

  • Cash = The physical existence of money.

  • Profit exists when the total revenue > total cost.

  • Credit sales, bad debts, stock holding, investments and seasonality shows these difference.