The Importance of Profit (AQA A Level Business) : Revision Note

Why is profit important?

• Maximising or increasing profit is often a key objective for many businesses

• Profit is important to businesses for a number of reasons

1.Financial reward

• Profit is the financial reward that entrepreneurs receive in return for the risks they take

  • Business owners invest long hours, creativity, their own money and effort to make a successful business

2. Source of finance

• Retained profit can be used to fund the purchase of assets, pay bills and invest in research and development

3. Indicator of success

• Increasing profitability suggests that a business is being run effectively and could be an attractive investment

• Profit levels can be compared over time and with similar businesses to determine how well a business is performing

The importance of profit to other organisations

• Some public sector organisations, such as public corporations, can have the objective of making a profit

  • Although social objectives may be more important, such as serving the local community, profits can be reinvested back into services such as education and healthcare

  • These profits, known as surpluses, could also be used to improve quality and service efficiency 

• Social enterprises also need to make a profit to survive, as they often have similar objectives to grow so that they can fund their social objectives

Revenue and costs

Revenue

• Revenue is the value of the units sold by a business

  • E.g the revenue earned by Apple Music from sales of music downloads 

• Revenue is a key business performance measure and must be calculated to identify profit

  • It is calculated using the formula

• Sales revenue usually increases as the quantity sold increases

• When a business sells one product, it is easy to calculate the sales revenue

• The more products a firm sells, the harder it is to calculate the sales revenue

  • Computer systems improve tracking of sales revenue when multiple products are sold by a business

Costs

• In preparing goods/services for sale, businesses incur a range of costs. These costs can be broken into different categories

Types of costs

Diagrammatic representation of costs

Fixed costs

• Fixed costs do not change according to output

• The fixed costs in this instance are $4,000

Variable costs

• Variable costs rise proportionally with output, as shown in the diagram

• At some point, a business may benefit from a purchasing economy of scale and the rise will no longer be proportional

Total costs

• The total cost is the sum of variable and fixed costs

• The total costs cannot be 0, as all organisations have some level of fixed costs

Calculating costs

• Based on the above definitions, we can calculate several different types of costs

Formulas to calculate different types of costs

Example: cost calculations where VC = £60

Measuring profit

• Profit is the money left over after all costs have been accounted for

• There are several different types of profit

Types of profit