Quick Overview
- Profit = Sales Revenue − Total Costs (the money left over after expenses)
- Gross Profit = Sales Revenue − Cost of Sales (profit before other expenses)
- Net Profit = Gross Profit − Expenses (profit after all business costs)
- Four Types of Profit: Gross profit, Net profit, Profit after tax, Retained profit
- Income Statement Structure: Revenue → Gross Profit → Net Profit → PAT → Retained Profit
- Profit vs Cash: A business can be profitable but insolvent (no cash) — this is crucial
- Using Income Statements: Compare year-on-year, analyse reasons for changes, benchmark against competitors
1. The Importance of Profit
What is Profit?
Profit is the surplus — the money left over after a business pays all its costs from sales revenue. Think of it like your pocket money: you earn money (revenue), you spend it on things (costs), and anything left is your profit.
Most businesses exist to make a profit. It's not greedy — profit is how businesses survive, grow, and reward owners for taking risks. Without profit, a business would eventually run out of money and close.
The Three Profit Formulas
Business studies has three main profit formulas you'll see repeatedly. They build on each other:
Profit = Sales Revenue − Total Costs
The simplest version — all revenue minus all costs.
Gross Profit = Sales Revenue − Cost of Sales
Revenue minus only the cost to make/buy the goods (materials + labour).
Net Profit = Gross Profit − Expenses
The real profit after deducting all other business costs (rent, advertising, utilities, etc.).
Why Does This Matter?
Each formula tells a different story. Gross profit shows how efficiently you make your goods. Net profit shows whether you're genuinely profitable once you've paid for everything. Understanding the difference is crucial for decision-making.
💡 Example: A café might have high gross profit on coffee (good markup on beans) but low net profit if rent is expensive. Net profit is what actually matters to the owner.
How to Increase Profit
There are only three strategies:
- Increase sales revenue: Sell more units or raise prices (if demand allows)
- Reduce costs: Find cheaper suppliers, reduce waste, improve efficiency
- Both: The ideal strategy — grow revenue and cut costs simultaneously
Why Profit Matters to Different Organisations
Private Sector Businesses (e.g., shops, restaurants)
Profit is the primary goal. It's a financial reward for the entrepreneur who invested time, money, and effort. Profit is also a source of finance — retained profits can be reinvested to buy new equipment, develop new products, or expand. Finally, profit is an indicator of success — increasing profit shows the business is efficient and well-run, which attracts investors.
Public Sector Organisations (e.g., NHS, schools)
These organisations don't aim for profit. Instead, they aim for surpluses — any money left over after running services. Surpluses can be reinvested into services (better equipment, more staff) or improve quality. The goal is serving the public, not enriching owners.
Social Enterprises (e.g., charities running businesses)
✓ Practice Question 1
The Critical Difference: Profit vs Cash
Profit and cash are not the same thing.
Profit
Cash
⚠️ Real-World Example: