What is Profit?
Profit is the difference between total revenue and total expenditure. Unlike other factors of production, profit is uncertain, paid last, can be negative, and fluctuates more often.
Gross Profit and Net Profit
- Gross profit = Sales − Cost of Goods Sold.
- Net profit = Gross Profit − Trading Expenses. Net profit is the business’s actual benefit — if it’s zero or negative, it may be time to close the business.
Factors Affecting Gross Profit
A higher cost of goods sold lowers gross profit; a fall in sales (e.g. through returns) lowers gross profit; a fall in purchases (through returns) reduces cost of goods sold and raises profit.
Key Ratios
- Mark-up = (Gross profit ÷ Cost price) × 100.
- Margin = (Gross profit ÷ Selling price) × 100 — gross profit as a percentage of turnover.
- Net profit as a percentage of goods sold = (Net profit ÷ Cost of goods sold) × 100.
- Net profit as a percentage of turnover = (Net profit ÷ Sales) × 100.
Worked Example
Sales = 5,000,000frs, Cost of goods sold = 3,000,000frs, Total expenses = 800,000frs.
- Gross profit = 5,000,000 − 3,000,000 = 2,000,000frs.
- Net profit = 2,000,000 − 800,000 = 1,200,000frs.
- Mark-up = (2,000,000 ÷ 3,000,000) × 100 = 66.67%.
- Margin = (2,000,000 ÷ 5,000,000) × 100 = 40%.
- Net profit as a % of goods sold = (1,200,000 ÷ 3,000,000) × 100 = 40%.
