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Finance Cheat SheetAS Business
Costs
● Fixed costs – do not vary with output eg; rent,
● Variable costs – increase as output increases eg: raw materials and wages……the more cars a
factory makes the more workers need to be hired and the more steel would have to be bought.
● Total Costs = fixed costs + variable costs
● Average costs or cost per unit = total cost
number of units
Average costs usually fall as a business grows because more units are produced but fixed costs stay the
same
Revenue
Revenue is also called “turnover” or “sales” or “total sales revenue” and it is the money a business takes
in from selling its products
Revenue = Price x quantity sold
Profit
Profit is the money a business can keep after paying its costs
Profit = Revenue – total costs
There are several types of profit that a business can calculate
GROSS PROFIT is the profit remaining after direct costs of production have been paid for eg: raw
materials. These costs are called “cost of sales” or ”cost of goods sold”
GROSS PROFIT = REVENUE - COST OF SALES
Operating profit
Operating profit show the amount of money left over after both direct costs and other costs have been
subtracted
They refer to those costs which a business faces from making and selling its product eg: rent,
advertising, insurance etc.
OPERATING PROFIT = GROSS PROFIT – OTHER OPERATING EXPENSES
Profit for the year (Net profit)
This is the money that a business is left with after paying for things like finance costs (interest on loans
and overdraft) and after paying tax
PROFIT FOR THE YEAR = OPERATING PROFIT+PROFIT FROM OTHER ACTIVITIES – NET
FINANCE COSTS – TAX
, PROFIT MARGINS – calculations to help a business analyse profitability
When a business wants to analyse HOW PROFITABLE THE ARE they use different types of profit and
compare it to sales revenue
Eg:
Company A: Operating Profit = $60 000 Sales revenue = $80 000
Company B: Operating profit = $60 000 Sales revenue = $1 000 000
So both companies have made the same profit (but are they equally profitable?) If you express each
company’s operating profit as a percentage of sales you can see which company is more efficient
at turning sales into operating profit.
Company A = 60 000 x 100= 75% Company B = 60 000x 100 = 6%
80 000 1 000 000
Other Profit margins are calculated in the same way:
Gross Profit margin = Gross Profit x 100
Revenue
Operating Profit margin = Operating Profit x 100
Revenue
Net Profit (profit for the year ) margin = Net Profit x 100
Revenue
Making Judgement on Profitability ie: What does it mean?
It is hard to say if a net profit margin of 10% is good or bad as it is going to depend on what the
business’ profit margin from previous years has been and what is the industry average or the
performance of a close competitor
What does it mean if profitability ratios are going up?
A good indicator of management effectiveness -they are doing well at converting sales revenue into
profit after costs have been taken away
A good way of measuring how good a business is at CREATING VALUE – an increasing trend in
profitability ratios would mean that the managers are becoming more effective in CREATING
VALUE
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