Measuring and Increasing Profit

• NET PROFIT MARGIN- the net profit generated as a percentage of the total sales of a business.
• RETURN ON CAPITAL- a ratio of the net profit returns as a percentage of the capital invested.
• LIQUIDITY- the ability to convert assets in cash without loss or delay. The most liquid asset is cash itself.
• CAPITAL INVESTED- the value of the money provided to the business by the owners.
• PROFITABILITY- the ability of a business to generate profit or its efficiency in generating profits.

net profit margin is the profit left over from sales once all costs have been paid and is considered a more meaningful measurement than gross profit.

The higher the percentage returns the better

To be meaningful the values need to be compared against each other and also against other competitors of a similar size in the industry

again a business will be seeking the highest value for this ratio

it should also be compared with past performance figures and/or rival businesses

The more the risk the higher the returns required!

1. Increasing Prices

Benefits

• higher profit margin for each item sold
• useful if few substitutes in the market

Drawbacks

• loss of customer loyalty as they will switch to cheaper alternatives
• Not a good idea if the product is price elastic!
• Might be a better idea to lower the price!

2. Reducing Costs

Benefits

• lower wages, cheaper location or new supplier?
• higher profit margin per unit.

Drawbacks

• impact on staff morale?
• lower quality?
• damage to reputation

3. Increasing Sales

Benefits

• Increased sales
• higher levels of profits

Drawbacks

• increased spending on marketing
• competitors will react!
• customers will be loyal to rivals

• Cash is money that is actually held within a business e.g. in its bank account
• Cash is essential for the survival of a business. Without cash a business cannot operate in terms of buying stock, paying suppliers, paying wages etc.
• A business needs to remain liquid at all times- It needs enough cash within the business.

• Profit is only a paper value that has yet to be realised in the form of cash
• Profitable businesses often fail because they do not properly manage their cash flow
• Profit is important for the long-term growth of a business
• Investors will look for the potential of future profits