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Calculating &Interpreting Profit
The importance of profit• Profit is the return for  taking a risk• Profit measures the  success of an  investment• Profit ...
The profit formula   PROFIT =TOTAL REVENUE       less TOTAL COSTS
Profit or loss?Revenue             Costs                Profit or Loss?£100,000            £75,000              £25,000 (p...
Two Ways of Measuring Profit• Profit in absolute terms  – The £ value of profits earned  – E.g. £50,000 profit made in the...
The profit choice   Once a profit has been made, the owner        of the business has a choice:Take the profit out        ...
Good reasons to reinvest profit into a             business• An important and cheap source of  finance• Decision is in the...
The Basics of Increasing Profits                            How to increase profit                              Increase q...
Dealing with a loss• Many start-ups make losses  – Costs incurred before trading begins  – Takes time to build up revenues...
NetProfitMargin
Net Profit Margin – What is Net Profit?                     Example             £’000  Net profit is                     S...
Net Profit Margin – the formula                 Net profit (before tax)Net profit             =                           ...
What does Net Profit Margin tell us?• How effectively a business turns its  sales into profit• How efficiently a business ...
The Importance of Comparison (1)  The net profit margin of a business should be  compared with other competitors in the sa...
The Importance of Comparison (2)                      Company A       Company B        Company C   Example                ...
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Calculating and Interpreting Profit

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This revision presentation provides an introduction to how profit is calculated

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  • This is a very useful tool to explain profit to second language speakers.
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  • This is a brilliant presentation for all AS/Alevel and IB students to easily revise this topic for exams since this is a question topic that frequently appears. thank you so much.
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Calculating and Interpreting Profit

  1. 1. Calculating &Interpreting Profit
  2. 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. 3. The profit formula PROFIT =TOTAL REVENUE less TOTAL COSTS
  4. 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. 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. 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. 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. 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. 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. 10. NetProfitMargin
  11. 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. 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. 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. 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. 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. 16. Keep up-to-date with businessstories, resources, quizzes and worksheets for your business course. Click the logo!

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