Profit and loss

Put simply, profit is the surplus left from revenue after paying all costs. Profit is found by deducting total costs from revenue. In short: profit = total revenue - total costs.

For example, if a firm has a total revenue of £100,000 and a total cost of £80,000, then they are left with £20,000 profit.

Profit is the reward for risk-taking. A business can use profit to either:

• Reward owners.
• Invest in growth.
• Save for the future, in case there is a downturn in revenue.

Losses

Trading does not guarantee profit. A loss is made when the revenue from sales is not enough to cover all the costs of production. For example, if a company has a total revenue of £60,000 and a total cost of £90,000, then they have lost £30,000 from trading.

Losses can be reduced or turned into profit by:

• Cutting costs, eg by letting staff go and asking those who remain to accept lower wages.
• Increasing revenue, eg by cutting prices and selling more items - if demand is elastic.

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