2.3.1 - Profits

• define profit:

  • profit is the financial gain of a business through trading and can be found by deducting expenditure from income, P = TC - TR.
• Gross profit formula:

  • sales revenue - cost of sales
• Operating profit formula:

  • gross profit - expenses (any extra costs that don’t involve production).
• Net profit formula:

  • operating profit - interest (due on loans or debts).
• How balance sheets help to measure profitability:

  • a business that is profitable will be able to reward its investors with a return on their investment.
  • business not profitable will not last long unless they make drastic changes.
• Profit margin:

  • how much of your revenue turns into actual profit after covering expenses.
• Gross profit margin formula:

  • gross profit/sales revenue - 100
• Operating profit margin formula:

  • operating profit/sales revenue x 100
• Net profit margin formula:

  • net profit/sales revenue x 100
• Ways to improve profitability (increase revenue):

  • have a sale, reduce the prices
  • advertise more
  • promote products more
• Reduce costs:

  • restructuring, delayering and redundancies.
  • automating production
• profit:

  Is recorded straight away.

  A business can trade for many years without profit.

  Improves profitability, business must increase revenue or reduce costs. .

  P = TR-TC

  Cash:

  Won’t be recorded until paid out or received which could be different every trading yr.

  A profitable business may go bust if it runs out of cash to pay a supplier or wages.

  If owners introduce cash via savings or a loan not affect profit figure.