Profit
-Is revenue minus costs or Sales minus expenses
-Gross profit is sales minus the main cost of the sales ( eg material)
-Net or operating profit is what remains when all expenses have been deducted
-Gross profit is sales minus the main cost of the sales ( eg material)
-Net or operating profit is what remains when all expenses have been deducted
Example of Profit and Loss account
-Remember … Profit is not the same as cash for instance in the table half of the £4m sales may have been sold on credit meaning the firm has not yet received the cash for the sales.
L3 Why is Profit Necessary ?
-For growth, expansion, new product development
-For attracting new investors -For paying dividends to existing investors
L4 – However
-Remember that a firm does not have to make a profit to survive. It can survive if it BREAKS EVEN. ie. Its costs are covered the value of its sales
-In the short term, cash is more important to a firm than its profit. If it doesn’t have cash to pay its bills, it will not survive.
Conclusion
Profit is important in the long term in order for the company to grow, but in the short term cash is more important.
L3 Why is Profit Necessary ?
-For growth, expansion, new product development
-For attracting new investors -For paying dividends to existing investors
L4 – However
-Remember that a firm does not have to make a profit to survive. It can survive if it BREAKS EVEN. ie. Its costs are covered the value of its sales
-In the short term, cash is more important to a firm than its profit. If it doesn’t have cash to pay its bills, it will not survive.
Conclusion
Profit is important in the long term in order for the company to grow, but in the short term cash is more important.