3.2.6

Profits

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Profitability Analysis

Businesses can analyse their profitability using gross profit, operating profit, and profit for the year objectives.

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Gross profit

  • Gross profit targets involve the amount of profit remaining once direct costs (cost of sales) have been paid by the business.
    • Gross profit margin = (gross profit ÷ sales revenue) × 100
  • For example, a supermarket may use gross profit margin targets to compare performance across years. A decrease in gross profit margins may lead the supermarket to focus on reducing the supermarket's cost of sales.
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Profit for the year

  • A profit for the year target involves the amount of profit remaining once all costs and financing fees have been considered.
    • Profit for the year margin = (profit for the year ÷ sales revenue) × 100

Improving Profit

Business may decide to focus on improving profit and profitability as part of their aims and objectives.

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Objectives

  • Profit and profitability can be increased by reducing expenditure on fixed and variable costs.
  • Profit and profitability can be increased by increasing the selling price per item.
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Challenges of improving profitability

  • Trying to reduce expenditure on fixed and variable costs can reduce quality which may reduce sales and therefore also reduce revenue.
  • Increasing the selling price can deter customers from purchasing products which can decrease sales volume and market share.

Jump to other topics

1Exploring Business

2Marketing Campaigns

3Business Finance

4International Business

5Principles of Management

6Business Decision Making

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