Revenue – The total amount of money made from the sales of a good.
Cost of sales – The costs associated with making the good e.g. raw materials
Gross profit = Revenue – Cost of sales.
Operating profit = Gross profit – Other operating expenses e.g. marketing
Net profit = Operating profit – Interest e.g. on loans
B) Statement of comprehensive income (profit and loss account)
Gross profit margin = Gross profit/revenue x 100
Operating profit margin = Operating profit/revenue x 100
Net profit margin = Net profit/Revenue x 100
This shows the different types of profit as a percentage of revenue. The higher the costs the lower the profit margin on goods will be. Therefore, the lower the profit margin percentage the more inefficient the business is likely to be as it indicates they are likely to have high costs. Therefore to increase the profit margin on goods is by increasing their revenues or lowering costs. If a business is making an operating profit but a net loss then it suggests that they’re spending a significant amount of money on interest repayments.
C) Distinction between profit and cash
Profit is recorded straight away after a sale, whereas cash inflows and outflows will be recorded after the respective debtor and creditor periods have elapsed, allowing the profit to be realised in cash terms. Therefore a business that is making a profit can fail if they have no cash to pay their debtors.