Chapter 34- Profit Flashcards
Gross Profit
The difference between revenue and sales
=revenue – cost of sales
Operating profit
operating profit is the difference between gross profit and business overheads
= gross profit – cost of sales
net profit
The difference between operating profit and interest and exceptional costs
= operating profit – interest (and exceptional costs)
Statement of Comprehensive Income
A financial document showing a company’s income and expenditure over a particular period of time
Measuring profit margins (three ways)
It is possible to measure the profitability of a business in a more meaningful way – this is done by calculating profit margins, which may be measure the size of profit in relation to revenue/turnover
Three profit margins can be calculated:
Gross profit margin
Operating profit margin
Net profit margin
Gross profit margin
Shows the gross profit made on sales turnover/revenue
= gross profit/ revenue x 100%
Higher gross margins are usually preferable to lower ones because it means that more gross profit is being made per £1 of sales
Can be increased by raising revenue relative to cost of sales, by increasing price
May be increased by cutting the cost of sales; this might be achieved by finding cheaper suppliers of key materials
Operating profit margin
Shows the operating profit made on sales revenue/turnover – operating margin is used to measure a company’s pricing strategy and operating efficiency.
= Operating profit/ revenue x 100%
A high or increasing profit margin is preferred – this is because more money is made on each £1 of sales.
Net profit margin
The net profit margin takes into account all business costs, including interest, other non-operating costs and exceptional terms
= Net profit before tax/ revenue x 100%
Ways to improve profitability
All businesses will want to improve their performance – an improved performance is likely to benefit all stakeholders – the returns on capital can be increased by making more profit with the same level of investment
- Raising prices – if a business raises the price, it will get more revenue for every unit sold – however raising price might also have an impact on the level of sales – generally, when price is raised demand will fall.
- Lowering costs: it might be possible to buy raw materials and components from new suppliers that offer better prices; another option might be to find ways of using cheaper labour – for examples some businesses have moved overseas for cheap eastern European labour
- Using existing recourses more efficiently is also an option – making better use of current recourses will improve efficiency and lower costs – a business might do this by introducing new working practices or training staff- this would help to raise labour productivity
Amortisation
The writing off of an intangible asset
Cost of Sales
The direct costs of a business
Exceptional Costs
A one off cost
Revenue
The total income of a business
