managing finance: Profit

amorisation

the writing off of an intangible assets ( which is is defined as a non-physical asset that provides value to a business.)

cost of sales

the direct costs of a business

exceptional costs

a one off cost like a large debt

gross profit

the difference between revenue/turnover and cost of sales

gross profit margin

gross profit as expressed as a percentage of revenue/turnover

operating profit

the difference between gross profit and business overheads

operating profit margin

operating profit as expressed as a percentage of revenue/turnover

profit of the year/net profit

the difference in operating profit and finance costs and exceptional items

net profit margin

net profit before tax as expressed as a percetage of revenue/ turnover

revenue/turnover

the total income of a business resulting from goods or sales or services

statement of comprehensive income

a financial document showing a company’s income and expenditure over a particular time period usually one year

how to calculate revenue

price X quanitity of sales

gross profit formula

revenue - cost of sales

operating profit

gross profit - operating costs

net profit or profit of the year

operating profit -( finance costs + exceptional costs)

5 ways to increase profit

• adjust the marketing strategy

• find new markets

• diversify

• mergers/takeovers

• disposal of non profitable activities

7 ways adjust the marketing strategy

• Invest more in advertising

• Invest in loyalty cards/promotional campaigns

• exploit new distribution channels

• Increase commission to sales staff

• improve customer targeting

• accept a wider range of payment methods

• encourage bulk buying or repeated purchases

find new market

launch products across countries and exploit overseas markets

diversifying

• increase revenue

• extending or creating new product lines

margers and takeovers

joining together businesses to grow profits

horizontal takeover

A horizontal acquisition occurs when one company acquires another company in the same industry and works at the same production stage.

verticle takeover

Vertical takeover is when a company takes ownership of suppliers, distributors, or retail locations to obtain greater control of its supply chain

disposal of non profitable activties

increasing profits by getting rid of poorer performing part of the business

what is associated with a statement of comprehensive income

PROFIT AND LOSS

how to measure profitability

calculating profit margins because they measure the size of profit in relation to revenue/turnover

how to calculate gross profit margin

grossprofit/revenue X 100

ways to increase the gross profit margin

• raising revenue, increasing the price

• Cutting the cost of sales by finding cheaper suppliers

• faster turnover = lower gross profit margin required

operating profit margin

operating profit/ revenue X 100

what does the operating profit margin show

profitability of sales from a regular business

net profit margin formula

operating profit / revenue X 100

what is net profit to owners

the final amount of money left over for them

3 ways to improve profitability in terms of margins

• raising prices

• lowering costs

raising prices

• improves revenue per unit sold

• this depend on how responsive demand is to a change in price

lowering costs

buying cheaper resources from new suppliers

using cheaper labour

drawbacks of lower costs

• can be considered lower quality because they could be inferior

• using existing resources more effectively → improves efficiency and lowers costs → labour productivity → capital productivity