go through and complete practice on paper 2.3.1 Profit

Types of profit

Gross profit = Revenue - Cost of sales

Operating profit = Gross Profit − Operating Expenses

Net profit = Operating Profit − Interest − Tax

Operating costs

Variable + Fixed operating costs

Cost of sales

Direct costs of production eg raw material, wages

Net profit

Final profit after deducting all costs eg interest, tax, and non-operating items.

Profit margins

Amount sales revenue exceeds costs

Gross profit margin

Percentage of revenue the is turned into gross profit

Expressed a percentage

Gross profit/Revenue x 100

Operating profit margin

Percentage of revenue turned into operating profit

Operating Profit/Revenue x 100

Net Profit Margin

Percentyage of revenue turned into net profit before tax

Net profit/Revenue x 100

Ways to improve profitability

1. Raise prices - Depends on elasticity of products

- For price elastic products, this will reduce revenue

- For Price inelastic products, this will increase revenue

2. Reducing other expenses eg staff, relocating to cheaper premises

- May reduce staff morale reducing productivity

3. Reducing one of costs + Interest charges

- Leasing rather than buying equipment

Distinction between Profit + Cash

Profit - difference between revenue and total costs

Cash - The actual money flowing in and out of a business