2.3.1 Profit

Profit Formulas

$$Gross profit = Sales revenue – Cost of sales$$ $$Operating profit = Gross profit – Other operating expenses$$ $$Net profit = Gross profit – Overheads$$

🔗 Overheads/Expenses = Costs other than the cost of sales (usually fixed) e.g., tax, interest, rent, marketing and insurance

Profit Margin Formulas

$$Gross profit margin = Gross profit/Sales revenue x 100$$ $$Net profit margin = Net profit/Sales revenue x 100$$ $$Operating profit margin = Operating profit/Sales revenue x 100$$ $$Return on capital employed (R.O.C.E) = Net profit/Capital employed x 100$$ $$Capital employed = Debt + Equity$$

Ways to improve profitability

• Raise sales price, will increase profit on each unit sold, improve profitability May cause a fall in sales - this working will depend on the price elasticity of demand, if inelastic it will be fine

• Increase the quantity sold, fixed costs will be spread over a wider range of output, reducing average costs, improving profitability This may not always be possible and may require additional promotion which would increase costs

• Reduce costs, improve profitability The danger of cutting costs is that it may mean compromising on quality, lose customers, brand image tarnished.

• Cut back on waste, increasing efficiency, will help cut costs, improving profitability

• Make better use of resources, produce more output with the same level of input, increase efficiency, reduce average costs, improve profitability

• If the product is currently labour intensive lay off workers, become more capital intensive, rely on machinery Depends on whether the business has the capital to invest in more equipment

Difference between Profit and Cash

Profit is total revenue – total costs, whereas cash flow is the inflows and outflows of a business in a given time period.