2.3.1 Profit

• Profit is the financial gain of a business through trading and can be found by deducting expenditure from income.
• 3 types of profit:

  • Gross profit

  • Operating profit

  • Profit for the year (Net profit)
• • Gross Profit= Revenue - Cost of sales
  • Operating Profit= Gross Profit - other operating expenses
  • Net Profit= Operating Profit -Interest/tax/Exceptional costs
• Profitability is the ratio of profit over revenue, expressed as a percentage. Mainly an indication of the ability of a company to control costs.
• Gross Profit Margin:

  Tells a business how much gross profit is made for every pound of sales revenue received.
• Gross Profit Margin = (Gross Profit / Revenue) x 100
• Operating Profit Margin:

  • Examines the relationship between the operating profit and the level of revenue.
  • How profitable is the business’s activities?
• Operating Profit Margin = (Operating Profit / Revenue) x 100
• Net Profit Margin:

  • The net profit margin is the proportion of sales revenue that is left once all costs have been paid.
  • It tells a business how much net profit is made for every pound of sales revenue received.
• Net Profit Margin = (Net Profit / Revenue) x 100
• Profit:

  • Profit is recorded straight away
  • A business can trade for many years without profit
  • To improve profitability a business must either increase their revenue or reduce their costs as:
  • P = TR- TC
• Cash

  • Cash will not be recorded until it is be in a different trading ye could be in a different trading year
  • A profitable business may go bust if it runs out of cash to pay a supplier or wages of staff
  • If owners introduce cash via savings or a loan this will not affect the profit figure