1. Profit

2. The importance of profit Profit is the return for taking a risk Profit measures the success of an investment Profit is an important source of finance

3. The profit formula PROFIT = TOTAL REVENUE less TOTAL COSTS

4. Profit or loss? RevenueCostsProfit or Loss? £100,000£75,000£25,000 (profit) £100,000£125,000£25,000 (loss) Total revenue greater than total costs Total costs greater than total revenue Total revenue = total costs = Profit = Loss = Break-even

5. Two Ways of 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 revenues achieved or investment made – E.g. £50,000 profit from £500,000 of revenue is a profit margin of 10% – E.g. £50,000 profit from an investment of £1 million = a 5% return on investment

6. The profit choice Once a profit has been made, the owner of the business has a choice: Take the profit out of the business Dividends Drawings Re-invest the profit in the business e.g. new machinery & technology Open new locations Buy more stocks or

7. Good reasons to reinvest profit into a business An important and cheap source of finance Decision is in the control of the entrepreneur Profits are flexible – can reinvest some or all Shareholders will usually be supportive

8. The Basics of Increasing Profits Revenue Variable Costs less Fixed Costs less Profit = Increase quantity sold Increase selling price Reduce VC per product Reduce fixed costs Increase output How to increase profit

9. Dealing with a loss Many start-ups make losses – Costs incurred before trading begins – Takes time to build up revenues Plenty of action that can be taken – Keep tight control of costs, particularly fixed costs – Try to minimise waste – Don’t take on too many people or expand too quickly unless the business can afford it

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