Profit and loss

A business can work out the profits or losses by subtracting the total revenue from the total costs

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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