Managing Finance


 Managing Finance


  • Can be measured in different ways.
  • Main ones are gross profit, operating profit and profit of the year. (net profit).
  • Gross profit =  turnover (or sales revenue or total revenue) minus variable costs, usually shown as costs of sales or cost of goods sold (COGS).
  • Gross profit = turnover - variable costs.
  • Provides useful guide but does not take into account fixed costs (overheads).
  • Businesses need to know how much money is left after all costs have been paid.

Operating Profit

  • Gross profit - fixed costs (overheads).
  • Operating profit = Turnover - (Fixed + Variable costs).
  • Key indicator of the businesses performance and a figure that shareholders will watch very carefully over time.
  • Also known by EBIT (Earnings Before Interest and Taxes).
  • Does not include any profit earned after investments might have or the effects of interest rates or taxes.

Profit for the Year (net profit)

  • Operating profit - tax plus interest. Interest may be positive or negative.
  • Profit for the Year = Turnover - (Fixed + Variable Costs) - (Tax + Interest)
  • Profit for the year, net profit, net income and net earnings are different terms for the same thing.
  • Appears at the bottom of the income statement.
  • What is left over after all costs and expenses have been deducted out of total revenue.
  • The amount of profit that goes to owners of the business who then choose what to do with it.
  • Can be ploughed back into the business or can provide a dividend for owners/shareholders.

Statement of Comprehensive Income (Profit or Loss Account)

  • Gross profit, operating profit and profit for the year are all part of this. (previously called the profit and loss account.
  • Sets out figures for sales revenue (turnover) and then deducts each different group of costs to arrive at a figure for profit (or loss). 
  • Sometimes referred to as an income statement.
  • Measures financial performance of a business.
  • All limited companies by law should produce an income statement. 
  • However, in any case, they need to keep financial records for their own planning and monitoring needs, as well as the taxman. 
  • Summarises all transactions over a specified period, usually a year or a quarter.
  • Vary from one business to another. Accoutants do not use the same terms in exactly the same way.
  • All follow roughly the same pattern, starting with sales revenue and deducting all costs to show how profit has been calculated.
  • The stages are:

Revenue: minus the cost of sales

Gross Profit: minus other operating expenses

Operating Profit: minus taxes and interest

Profit for the Year

Measuring Profitability

  • Profitability- describes the ability of a business to generate profits from it's resources. Profit figures on their own may not helo in making comparisons. Relates to profit levels and the size of the business. 
  • Can't tell if profitability has improved without using a profit margin, which is a financial ration (a figure calculated from the income statement figures to give useful information to the business managers). 
  • Profit Margin - tells the business…




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