gcse economics - business finance - what happens to profit
Profit is vital for the well being of businesses and also the functioning of the economy.
The distribution of profit will depend on a number of factors
1. the objectives of the business (to grow or remain in a similar position)
2. the type of ownership (does it have shareholders)
3. the amount of profit made
How is profit distributed?
Taxes :
Approximately 25% of all profits are paid to the Government in tax. This is usually called corporation tax
Day to day running
Some profits are retained in order to ensure the well being of the business in future years. For example, a recession may be feared and the business needs to ensure that it has enough cash / assets to survive and pay its essential bills
Dividends
A limited company will be expected to share some of its profits with its shareholders. These ‘thank you’ payments are called dividends. This is perhaps more important for a plc than a ltd.
Re investment / ploughing back
Profits may be used for investment into the future of the business. Examples
include machinery, new factories or general expansion. This is also an important
contributor to economic growth in the UK
ACTION
A Imagine that you owned a chain of shops as a limited company. In 2001 you made £50,000 profit. How would you choose to distribute the profit?
SMART
THINKING
B Why might it be more important to pay out dividends as a plc (public limited) rather than a ltd (private limited).
These GCSE Economics revision notes have been kindly provided by Peter Davies of Mill Hill School, Ripley Keep Up-todate with your GCSE Economics - Subscribe Free to Economics in the News by Email
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