Business Calculations
Business: Edexcel IGCSE, topic 3.5.1
Gross Profit
Gross profit is an important part in business calculations. Gross profit is equal to revenue minus cost of sales.
Gross profit
- Gross profit = revenue – cost of sales
- The higher a business’ gross profit is, the greater the difference between the price and the cost of sales. This is better for a business as they are making more profit excluding the business’ other costs.
Gross profit margin
- This is gross profit as a percentage of revenue:
- Gross Profit Margin (%) = (Gross Profit/Revenue) x 100
- It shows the average difference between the price that the company are able to charge customers and the costs directly associated with making and selling the product.
- Gross profit margin is a potential indicator of the efficiency of a company using its raw materials and labour during the production process.
Higher gross profit margin is better
- The higher the gross profit margin the better it is for the firm, as they are able to turn a higher portion of revenue into profit.
- It can be used to compare the profitability of products and to compare profits between different periods of time.
Net Profit
Net profit is the profit left over after all costs have been taken away from revenue. Net profit is equal to total revenue minus total costs. Expenses like advertising, insurance, rent and business rates are taken away before calculating net profit.
Net profit margin
- This is net profit as a percentage of revenue:
- Net Profit margin (%) = (Net Profit/Revenue) x 100
- It is a measure of how efficiently a company can turn sales into profit and so is an important indicator of the firms performance.
Higher net profit margin is better
- The higher the net profit margin, the better it is for a firm as they are able to turn a higher percentage of revenue into profit.
Test yourself on Business Calculations
Why is a higher net profit margin better for a firm?