Study Notes

Profit - What is it?

Level:
GCSE, AS, A-Level
Board:
AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

A good definition of profit is "the reward or return for taking risks & making investments".

For most businesses, making a profit is a key objective. You also need to appreciate that profit is also the most important source of cash flow & finance for a business.

However, don’t forget that there can be reasons for running a business other than the “profit motive”. For example, social enterprises exist to make a return that can be reinvested to meet society aims.

Profit can be calculated as:

Total Sales (Revenues) less Total Costs

The profit earned by a business can be measured in absolute and relative terms.

Profit in absolute terms would measure the £ value of profits earned in a specific period - e.g. £250,000 net profit made in the year.

Profit in relative terms would look at the profit earned as a proportion of sales achieved or investment made.

  • E.g. £50,000 profit from £500,000 of sales is a profit margin of 10%
  • E.g. £50,000 profit from an investment of £1 million = a 5% return on investment

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