This document discusses calculating and interpreting profit. It explains that profit is the return from taking a risk and measures business success. The profit formula is total revenue minus total costs, with profit occurring when revenue exceeds costs. Methods for measuring profit include absolute profit amounts and relative profit margins. The document also provides strategies for increasing profits such as raising prices or sales volumes while lowering costs.

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 = Profit
Total costs greater than total revenue = Loss
Total 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 price
less Variable Costs Reduce VC per product
Increase output
less 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. Net
Profit
Margin

11. Net Profit Margin – What is Net Profit?
Example £’000
Net profit is
Sales 150
what 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

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