© Boardworks Ltd 2008 1 of 21 3.1 Costs, Revenue and Profit for Business Organizations Unit 3:...

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3.1 Costs, Revenue and Profit for Business OrganizationsUnit 3: Investigating Financial Control


3.1 Costs, Revenue and Profit for Business Organizations

Unit 3: Investigating Financial Control


Contents

Teacher’s notes included in the Notes Page

Flash activity (these activities are not editable)

SoundPrintable activity

Key skills

For more detailed instructions, see the Getting Started presentation


Accompanying spreadsheet

Video


Calculating gross and net profit


In this section, you will consider how to calculate profit and how a business can maximize its profits.

Defining profit

Gross profit

Net profit

Maximizing profit

Profit and loss accounts


Every business – however small or large – aims to make a profit.

The importance of profit

A business may use the profit it makes in numerous ways:

Profit is the revenue a business has left over after all necessary costs have been deducted.

expanding the business (e.g. opening new shops)buying more equipment

repaying any outstanding debts (e.g. loans)

keeping it in the bank to earn interest.

updating or upgrading existing equipment



Businesses use the figures in the profit and loss account to work out how much profit (or loss) has been made in that period of time.

A profit and loss account summarizes all of a business’s revenue and costs over a period of time, usually a year.

Why do you think producing a profit and loss account is useful for a business?

In order to be able to calculate whether or not a profit has been made, businesses keep a profit and loss account.


Case study: profit and loss account


Gross and net profit

In order to complete a profit and loss account, a business needs to calculate two types of profit: its gross profit and its net profit.

These figures are calculated using the information a business knows about its costs and revenue.

Why do you think it is useful for a business to calculate gross and net profit?

Finding out whether it has made a profit is very important for a business.


Calculating profit


Gross profit

Gross profit is the profit (or loss) that a business has made after its production costs.

You can use the following formula to calculate gross profit:

sales revenue - cost of sales = gross profit

Calculating gross profit is useful because it includes the costs that a business must pay, but cannot control. Knowing this figure helps a business to compare its performance with its competitors and manage all its other costs.

All the money that comes into a business

The cost ofproduction

(variable costs)


Calculating gross profit


Net profit (before tax)

Net profit (before tax) is the profit the business makes after all the direct costs (cost of sales) and indirect costs (total expenses) have been paid.

Net profit can be calculated using the following formula:

gross profit - total expenses = net profit

All the other operating costs of the business (fixed costs)

Net profit is the real measure of a business’s performance.


Tax

After tax has been paid, the business can decide what to do with the rest of its profit.

Once a business has calculated its net profit, it must pay tax to the Inland Revenue.

Companies will pay corporation tax. All other businesses (such as sole traders and partnerships) will pay income tax.

If you were Fred Snapper, what do you think you would do with

the profit left over after tax?

Fred Snapper is a sole trader. What sort of tax will he pay?


Profit formulae


Maximizing profits

However, many businesses aim to make their profits as large as possible (maximize them) in order to receive a good income and have enough money to reinvest back into the business.

Some businesses carry out the same activities year on year.

There are two main ways in which this can be done:

increasing revenue

reducing operating costs.

How exactly might businesses try to increase their revenue or reduce their operating costs?


Maximizing profits: increasing revenue

One method of increasing revenue is to increase the priceof a business’s goods or services.

Other methods include:

expanding the scale of the business

increasing advertising

reducing prices (in order to encourage a higher volume of sales).

introducing a new product or service

Which of these methods do you think would be the most effective way for a business to

increase its revenue?


Maximizing profits: reducing operating costs

One way to reduce operating costs is by minimizing usage, for example, reducing the cost of paying staff wages by making one or more employees redundant.

Can you think of any other ways a business could reduce its operating costs?

Operating costs can also be reduced by:

negotiating with suppliers to get better deals (e.g. cheaper stock)

sourcing new, cheaper suppliers

using new or fewer materials in order to reduce wastage.


Wheel of Misfortune


Assignment: Ray Carroll the butcher


Ray Carroll is a butcher in the village of Biddenden.

Watch this short film of Ray at work.

Then, prepare a presentation identifying:

the importance of costs, revenue and profit for Ray’s business;

potential causes of an increase in costs, revenue and profit and the effect this would have on Ray’s business.


Beat the boss!


Glossary

© Boardworks Ltd 2008 1 of 21 3.1 Costs, Revenue and Profit for Business Organizations Unit 3:...

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