T OPIC C.1 A U NDERSTAND HOW BUSINESSES MEASURE SUCCESS What is meant by the term success? How would each of these people define success? How would you define success? How does a business measure success?

T OPIC C.1 A U NDERSTAND HOW BUSINESSES MEASURE SUCCESS – M AKING A PROFIT By the end of this topic you will be able to: Define costs of sales Define and calculate different types of profit Explain the impact of positive and negative different types of profit on a business

R ECAP LEARNING AIM A: U NDERSTAND THE COSTS INVOLVED IN BUSINESS AND HOW BUSINESSES MAKE A PROFIT Work in pairs to test your understanding of the following terms: Fixed costs Variable costs Total costs (including formula) Revenue (including formula) Profit (including formula)

A NEW TERM – C OST OF SALES Revenue is the amount of money coming in from the sale of goods or services There will be costs associated with producing these goods or services These costs are called COST OF SALES Normally this will relate to the raw materials used to produce the product

C OST OF SALES What would be the cost of sales of making a teddy bear? Draw a spider diagram to identify all the associated costs

Q UESTION TIME 2 MARKS Which two of these is a cost of sale for a bakery? Buying a delivery vanPainting the front of the bakery Buying ingredientsEmploying a chef

S AY WHAT YOU SEE There are 2 types of profit __________________ Profit C G

G ROSS P ROFIT The money made from selling a product after the cost of producing it has been deducted Sales revenue – cost of sales = gross profit

G ROSS P ROFIT In the examination you will need to know the formula for gross profit Gross profit = revenue – cost of sales

Q UESTION TIME 2 MARKS A small business bakes and sells luxury cupcakes. Each cup cakes sells for £1.50 The business sold cupcakes last year The cost of sales is £0.50 per cupcake Calculate the gross profit for the business £

POSITIVE AND NEGATIVE GROSS PROFIT Positive gross profit Implies a healthy sales revenue with well managed cost of sales Can look to invest in future developments e.g. new products Look to identify potential for growth e.g. expanding into new segments Reward top performing teams/staff Negative gross profit Implies either sales revenue is disappointing or costs of sales are not being managed Look to take corrective action Increase sales Price changes Promotion Product improvements Reduce costs Cheaper suppliers Improved processes Caution is needed when making decisions on positive gross profit as this is not the end of the story!

30 S ECOND T EST End What is the formula for gross profit?

N ET P ROFIT The money made from selling a product after all costs of have been deducted Gross profit – expenditure = net profit Recap – give 4 examples of expenditure. Take care not to state costs that would already have been deducted in costs of sales.

N ET P ROFIT In the examination you will need to know the formula for net profit Net profit = gross profit – expenditure

Q UESTION TIME 2 MARKS A small business bakes and sells luxury cupcakes. Each cup cakes sells for £1.50 The business sold cupcakes last year The cost of sales is £0.50 per cupcake All other expenditure = £ Calculate the net profit for the business £

POSITIVE AND NEGATIVE NET PROFIT Positive net profit Results from positive gross profit and well managed expenditure Meets a business objective of profit Allows future objectives of growth Can reinvest in future or reward shareholders Compare performance across branches or products Negative net profit May be a result of negative gross profit or positive gross profit and poorly managed expenditure Identify areas of over spending Set tighter budgetary control Dampens future spending and growth opportunities

30 S ECOND T EST End What is the formula for net profit?

G ROSS AND N ET P ROFIT – IN PAIRS WRITE AN EXPLANATION OF THIS DIAGRAM Revenue = £ COS = £ Gross Profit = £ Expenditure = £ Net profit = £5 000

F INANCIAL CALCULATIONS - P RACTISE Terry sells luxury bathrobes to boutique retailers across the UK Each robe sells to retailers at £75 and costs £35 in towelling and other raw materials used to make the product He sells 600 robes per month His monthly costs are: Distribution £2000 Wages £4500 Marketing £1000 Equipment £2500 Calculate Terry’s gross and net profit. You must show all your workings.

T OPIC C.1 A U NDERSTAND HOW BUSINESSES MEASURE SUCCESS – M AKING A PROFIT You have now completed this topic, are you able to? Define costs of sales Define and calculate gross profit Explain the impact of positive and negative gross profit on a business Define and calculate net profit Explain the impact of positive and negative net profit on a business Try the test yourself quiz number 5