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Calculating and Interpreting Profit
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Calculating and Interpreting Profit

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This revision presentation provides an introduction to how profit is calculated

This revision presentation provides an introduction to how profit is calculated

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  • 1. Calculating &Interpreting Profit
  • 2. The importance of profit• Profit is the return for taking a risk• Profit measures the success of an investment• Profit is an important source of finance
  • 3. The profit formula PROFIT =TOTAL REVENUE less TOTAL COSTS
  • 4. Profit or loss?Revenue Costs Profit or Loss?£100,000 £75,000 £25,000 (profit)£100,000 £125,000 £25,000 (loss)Total revenue greater than total costs = ProfitTotal costs greater than total revenue = LossTotal revenue = total costs = Break-even
  • 5. Two Ways of Measuring Profit• Profit in absolute terms – The £ value of profits earned – E.g. £50,000 profit made in the year• Profit in relative terms – The profit earned as a proportion of revenues achieved or investment made – E.g. £50,000 profit from £500,000 of revenue is a profit margin of 10% – E.g. £50,000 profit from an investment of £1 million = a 5% return on investment
  • 6. The profit choice Once a profit has been made, the owner of the business has a choice:Take the profit out Re-invest the profit of the business in the business Dividends or e.g. new machinery Drawings & technology Open new locations Buy more stocks
  • 7. Good reasons to reinvest profit into a business• An important and cheap source of finance• Decision is in the control of the entrepreneur• Profits are flexible – can reinvest some or all• Shareholders will usually be supportive
  • 8. The Basics of Increasing Profits How to increase profit Increase quantity sold Revenue Increase selling priceless Variable Costs Reduce VC per product Increase outputless Fixed Costs Reduce fixed costs = Profit
  • 9. Dealing with a loss• Many start-ups make losses – Costs incurred before trading begins – Takes time to build up revenues• Plenty of action that can be taken – Keep tight control of costs, particularly fixed costs – Try to minimise waste – Don’t take on too many people or expand too quickly unless the business can afford it
  • 10. NetProfitMargin
  • 11. Net Profit Margin – What is Net Profit? Example £’000 Net profit is Sales 150what is left after Wages (50)all the costs of Energy costs (25) a business Marketing (15) have been Other overheads (30) taken from its NET PROFIT 30 sales revenue Net profit margin 20%
  • 12. Net Profit Margin – the formula Net profit (before tax)Net profit = X 100 margin Sales Note: net profit margin is expressed as a percentage
  • 13. What does Net Profit Margin tell us?• How effectively a business turns its sales into profit• How efficiently a business is run• Whether a business is able to “add value” during the production process (a high margin business must be doing something right!)
  • 14. The Importance of Comparison (1) The net profit margin of a business should be compared with other competitors in the same market, and over time Company A Company B Company C Example £’000 £’000 £’000 Sales 150 250 500 Net profit 50 25 125 Net margin 20% 10% 25%
  • 15. The Importance of Comparison (2) Company A Company B Company C Example £’000 £’000 £’000 Sales 150 250 500 Net profit 50 25 125 Net margin 20% 10% 25% Company A makes a higher Company C makes the net profit than Company B highest net margin of these even though its sales are three & also the highest lower – because it has a sales. So it makes the higher net profit margin largest net profit too
  • 16. Keep up-to-date with businessstories, resources, quizzes and worksheets for your business course. Click the logo!