1. Starter Answer the following: 1.Breakeven is important for a business because? 2.Give 2 pros and cons of working out what a business needs to break even. 3.What is the margin of safety and why is it important?

3. What you need to know Calculation of: –Gross profit –Operating profit –Profit for the year (net profit) Measuring profitability: –Calculation of gross profit margin, operating profit –margin, and profit for the year (net profit) margin Ways to improve profitability Distinction between profit and cash

4. Profit Links Closely With – explain for each Improving Profit Unit costsEfficiencyProductivityBreakeven Sources of Finance & Cash Flow Adding value

5. What is Profit? Profit is the reward or return for taking risks & making investments

6. Two Approaches to Measuring Profit Profit in absolute terms – The £ value of profits earned – E.g. £50,000 profit made in the year Profit in relative terms – The profit earned as a proportion of sales achieved or investment made – E.g. £50,000 profit from £500,000 of sales is a profit margin of 10% – E.g. £50,000 profit from an investment of £1 million = a 5% return on investment

7. Profit Formula PROFIT =

8. Profit can be Broken Down Into… Revenues (sales)less Cost of Sales= GROSS PROFITless Expenses & Overheads= OPERATING PROFIT (net)

9. Different Measurements of Profit There are three key measurements of profit which are shown on the INCOME STATEMENT of a business Gross Profit Operating Profit Profit for the Year

10. The importance of profit Why is it important?

11. The importance of profit Measure of the success of a business Capital for investment Magnet – attracts further investment Unlikely in first year for new businesses

12. Profit in action! http://www.bbc.co.uk/learningzone/clips/the- dragons-decide-not-to-invest/11144.html http://www.bbc.co.uk/learningzone/clips/the- dragons-decide-not-to-invest/11144.html

13. What is Ratio Analysis? Analysing relationships between financial data to assess the performance of a business

14. Two Profitability Ratios to Look At Gross profit margin Operating profit margin

15. Calculating the Gross Profit Margin £'000201420152016 Revenue250325400 Cost of Sales150186225 Gross Profit100139175 Gross margin40.0%42.8%43.8% Gross profit = revenue less cost of sales Gross margin (%) = gross profit / revenue

16. Gross Profit Margin - Formula Margin (%) = Gross profit Revenues x 100 Gross profit = £200,000 Revenues = £800,000 Gross profit margin = £200,000/ £800,000 = 25% Gross profit = £200,000 Revenues = £800,000 Gross profit margin = £200,000/ £800,000 = 25% Example

17. What is Operating Profit? Operating profit is what is left after all the costs of a business have been taken from its revnues Example£’000 Revenues150 Wages(50) Energy costs(25) Marketing(15) Other overheads(30) OPERATING PROFIT30 Operating profit margin20%

18. Operating Profit Margin - Formula Operating profit margin = Operating Profit Revenues X 100 Note: operating profit margin is expressed as a percentage

19. What does Operating Profit Margin tell us? How effectively a business turns its sales into profit How efficiently a business is run Whether a business is able to “add value” during the production process (a high margin business must be doing something right!)

20. Ways businesses can improve profits: 1.Increase quantity sold 2.Increase selling price 3.Decrease costs 4.Increase product range 5.Increase production output For each explain: a)Why would this help b)Why might not it help/work?