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.

Gross profit

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.
Profit for the year

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.

Objectives

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.
Challenges of improving profitability

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
1

Exploring Business

1.1

Features of Business Organisations

1.1.1Sole Traders & Partnerships1.1.2Private & Public Limited Companies1.1.3Types of Liability & Not-For-Profits1.1.4Purposes of Businesses1.1.5Purposes of Businesses 21.1.6The Different Economic Sectors1.1.7Multinational Companies1.1.8Stakeholders1.1.9Influence of Stakeholders
1.2

Organisation of Businesses

1.2.1Organisational Structure1.2.2Types of Organisational Structures1.2.3Business Aims & Objectives1.2.4Business Aims1.2.5Business Objectives
1.3

Business Environment

1.3.1External Influences1.3.2Political & Legal Change1.3.3Economic Environment1.3.4Social & Technological Environment1.3.5Lifestyle & Technological Environment1.3.6Corporate Social Responsibility1.3.7The Competitive Environment1.3.8Innovation1.3.9Risk & Uncertainty1.3.10Porter's Five Forces1.3.11SWOT Analysis
2

Marketing Campaigns

2.1

Marketing

2.1.1Setting Marketing Objectives2.1.2Customer Needs2.1.3The Market2.1.4Competition & The Market2.1.5Consumer Behaviour2.1.6Market Research2.1.7Forms of Market Research2.1.8Market Segmentation2.1.9Cultural & Social Factors in Marketing2.1.10Promotional Decisions 32.1.11Pricing Strategies
2.2

Marketing Mix

2.2.1Marketing Mix2.2.2Product Life Cycle2.2.3Pricing Decisions & Price Skimming2.2.4Pricing Decisions & Price Penetration2.2.5Promotional Decisions2.2.6Promotional Decisions 22.2.7Promotional Decisions 32.2.8Market Mapping
3

Business Finance

3.1

Sources of Finance

3.1.1Internal Finance3.1.2External Finance3.1.3External Finance 23.1.4Sources of Business Finance
3.2

Financial Planning

3.2.1Revenue3.2.2Costs3.2.3Cash & Cash Flow3.2.4Cash & Cash Flow 23.2.5Break-Even Analysis3.2.6Profits
3.3

Financial Statements

3.3.1Balance Sheets3.3.2Income Statements3.3.3Liquidity
4

International Business

4.1

Globalisation

4.1.1Growing Economies4.1.2Specialisation & Trade
4.2

International Business

4.2.1Internationalisation4.2.2International Trade4.2.3MNCS4.2.4Conditions that Prompt Trade4.2.5Assessment of a Country
4.3

International Economic Environment

4.3.1Globalisation4.3.2Factors Contributing to Globalisation4.3.3Protectionism4.3.4The EU & the WTO4.3.5Trading Blocs
4.4

Factors Affecting International Business

4.4.1Global Competitiveness4.4.2Ethics of Global Business4.4.3Controlling MNCs4.4.4Cultural & Social Factors in Marketing
5

Principles of Management

5.1

Management & Leadership

5.1.1Managers5.1.2Management Theories5.1.3Managing Organisational Culture5.1.4Management Style
5.2

Theories of Motivation

5.2.1Motivating & Engaging Employees5.2.2Taylor's Theory5.2.3Mayo's Theory5.2.4Maslow's Theory5.2.5Herzberg's Theory
5.3

Managing Change

5.3.1Change5.3.2Key Factors in Change5.3.3Scenario Planning5.3.4Managing Change5.3.5Managing Strategic Implementation
6

Business Decision Making

6.1

Business Principles & Practices

6.1.1Influences in External Environments6.1.2Product Decisions6.1.3Competitive Environment6.1.4Corporate Strategy6.1.5Quantitative Sales Forecasting6.1.6Legislation
6.2

Quality Management

6.2.1Importance of Quality6.2.2Measuring Quality6.2.3Total Quality Management6.2.4Evaluating TQM
6.3

Human Resources

6.3.1Contracts6.3.2Recruitment6.3.3Training a Workforce
6.4

Documents & Business Decisions

6.4.1Sales Forecasts6.4.2Managing Strategic Implementation6.4.3Problems with Strategy

Practice questions on Profits

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  1. 1
    A clothing retailer has annual sales revenue of £1,000,000. The cost of sales, which includes materials and production costs, amounts to £600,000. Calculate the gross profit margin for the retailer.Multiple choice
  2. 2
    A technology company reports sales revenue of £2,500,000 and has direct costs (cost of sales) of £1,200,000. The company also incurs indirect costs (expenses) totaling £700,000. Calculate the operating profit margin for the company.Multiple choice
  3. 3
    A restaurant generates a sales revenue of £800,000. After deducting all costs, including the cost of sales, expenses, and financing fees, the restaurant's profit for the year is £120,000. Calculate the profit for the year margin.Multiple choice
  4. 4
    How is increasing the selling price per item likely to affect profit?Multiple choice
  5. 5
    What is the potential danger of reducing expenditure on fixed and variable costs?Multiple choice
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Break-Even Analysis

Balance Sheets