2.3.1 - Profit Flashcards
What is profit
- Profit is the financial gain of a business through trading and can be found be deducting expenditure from income
- There are 3 types of profit :
- Gross Profit
- Operating Profit
- Net Profit
What is a statement of comprehensive income
• PLCs and limited companies(Ltds) need to publish their accounts every year, this is UK law
• As part of those accounts they need to show their profit and loss and this appears in their “statement of comprehensive income (SOCI)”
• You will need to use extracts from a SOCI to make calculations
What is the gross profit formula
GP (gross profit) = SR (sales revenue)- Cost of Sales
What is operating profit
OP (operating profit) = GP (gross profit) - Expenses
What is the net profit formula
NP (net profit) = OP (operating profit) - Interest
How does the statement of comprehensive income helps to measure profitability
• A business that is profitable will be able to reward its investors with a return on their investment e.g. dividends paid on shares
• A business that is not profitable will not last long unless drastic changes are made
• The statement of comprehensive income helps managers, owners and investors to know how the business is doing by measuring the profitability
What is the gross profit margin formula %
GP margin = Gross Profit
_____________ x 100
Sales Revenue
What is operating profit margin formula %
OP margin = Operating Profit / Sales Revenue x 100
what is Net profit margin formula
NP margin = Net Profit
________________ x100
Sales Revenue
Ways to improve profitability (increase revenue)
• This can be done in a number of ways;
• Have a sale, reduce the prices
• Advertise more e.g. Yorkshire tea – see the advert on the right and the other advert HERE
• Promote the products more
Ways to improve profitability (reduce costs)
• This could be done through a number of ways, here are two suggestions:
• Restructuring, delayering and redundancies
• Automating production
What are some key feature of 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
What are some key features in Cash
• Cash will not be recorded until it is paid out or received which could be in a different trading year
• A profitable business may go bust of 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
