Chapter 18: Measuring and increasing profit

Profit vs. Profitability 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 Profitability = £Profit / £Revenue * 100% = Profitability %

Profit vs. Profitability EX1: a business makes £100,000 profit in a year by selling £700,000 worth of goods and services over the 12 months. Calculate its profitability. EX2: a business earns £16,000 profit from sales of £100,000. Calculate profitability. Which business is most profitable?

Net Profit vs. Operating Profit Net Profit – the profit made from ALL activities. Occasionally, this can be misleading because a business may make a lot of money by selling an asset that it owns. Net Profit Margin – this measures net profit as a percentage of sales. Net profit margin (%) = net profit before tax * 100 sales (turnover)

Net Profit vs. Operating Profit Operating Profit – is the profit made from trading (ie: the main activities of the business). Operating Profit Margin – this measures net profit as a percentage of sales. Operating profit margin (%) = operating profit before tax * 100 sales (turnover)

Calculating the return on capital Return on capital – ratio showing net profit (o.p. can also be used) as a percentage of capital invested. Capital invested – all of the money provided to the business by owners. Return on Capital (%) = net profit before tax * 100 capital invested