Profitability

The aim of businesses in the private sector is to make a profit.

Profit is important in three ways:

money, accounting records and a calculator

1. It rewards the business people who have taken risks to run it
2. It provides the funds to develop the business further
3. It is a source of cash, which allows the business to meet its debts

The purposes of a firm's trading account and profit and loss account are to calculate and show the gross and net profits. To measure how profitable a business is, percentages are used. This makes it easier to compare one set of results with those of a previous year, or those of a competitor.

You may be expected to answer questions in the exam about information given in a trading account and profit and loss account, like Go Faster Sports below. You may have to provide information about the gross profit margin [Gross profit margin: Total profit made in a year as a percentage of sales. ], the net profit margin [Net profit margin: Total profit minus costs made in a year - as a percentage of sales. ] or the Return on Capital Employed [Return on capital employed: Percentage earnings on capital invested in the business by the owners/shareholders. ] (ROCE).

A company's published accounts provide investors with indicators about the business' profitability. This will influence the future decisions of managers and investors.