Chapter 18

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Profit

profit

 

Profit – the difference between the income of a business and its total costs.

 

        PROFIT = REVENUE – TOTAL COSTS 

 

Profitability – the ability of a business to generate profit or the efficiency of a business in generating profit.

 

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Net Profit

Net profit margin

 

This measures net profit as a percentage of sales. Net and operating profits are considered the best measure of a firms profit, whiles sales turnover is an excellent measure of scale

 

Net profit margin (%) = net profit before tax/ sales (turnover) x 100

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Return on Capital

Return on capital

 

Ratio showing net profit as a percentage of capital invested**

 

** all of the money provided to the business by owners

 

Return on capital (%) net profit before tax /capital invested x 100

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Method of improving profits and profitability

Methods of improving profits and profitability

 

Many ways of increasing profit:

*increasing the price

*decreasing costs

*increasing sales volumes

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Smaller ways to increase profit

Smaller ways to increase profit/profitability

*investment in fixed assets

*product development

*marketing

*human rescourse stratedgies

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Liquidation

the ability to convert an asset into cash without loss or delay. With a firm being forced to close and sell its assets in order to pay suppliers ect. 

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