Cambridge O Level Business Studies · Syllabus 7115 · Understanding Business Activity
Profit
What is Profit?
The surplus remaining when the total costs of running a business are deducted from its sales revenue over a period. Profit measures financial performance rather than size, and it differs from added value, which deducts only the cost of bought-in materials and components, and from cash, which is the money actually available on a given day.
This definition is part of the Understanding Business Activity chapter in Cambridge O Level Business Studies.
Common mistakes with Profit
- “Added value is the same as profit.” Correct Added value deducts only bought-in materials and components. Wages, rent, energy and marketing are still to come out of it. A business can create high added value and still make a loss.
- “The biggest business is the one that makes the most profit.” Correct Profit measures performance, not size. Size is measured by number of employees, value of output, sales revenue or capital employed.
- “Growth always increases profit.” Correct Growth raises costs before it raises revenue, strains cash, and can bring diseconomies of scale. Profit rises only if the extra revenue exceeds the extra cost.
- “Stakeholders always conflict.” Correct Conflict is conditional. Rising productivity can fund both higher wages and higher profit; cleaner technology can cut waste costs and pollution together. Analyse the actual decision and time period.
Questions students ask about Profit
What is the difference between added value and profit?
Added value is the difference between the selling price of a product and the cost of the bought-in materials and components used to make it. Profit is the surplus remaining when the total costs of running the business are deducted from sales revenue. Added value deducts only bought-in materials; wages, rent, energy and marketing still have to come out of it, so a business can create high added value and still make a loss.
What is the difference between a sole trader and a partnership?
A sole trader is a business owned and controlled by one person, who provides the capital, keeps all the profit and carries unlimited liability for the business's debts. A partnership is owned by two or more people who share the capital, the decisions, the profits and, in most cases, unlimited liability. Both are unincorporated, with no legal identity separate from their owners. A partnership brings more capital and shared skills, but control, profit and risk are shared too.
What is the difference between a public limited company and a public corporation?
A public limited company is a private-sector business owned by shareholders, whose shares may be offered for sale to the general public; it is not owned by the government. A public corporation is a public-sector organisation owned or controlled by government and run by an appointed board, financed mainly by government and often pursuing public-service objectives rather than profit. The word "public" means different things in the two names, and confusing them is a common error.
Why is profit not a measure of business size?
Because profit measures financial performance, not size. Size is measured by number of employees, value of output, sales revenue or capital employed, and each measure has a limitation — capital employed, for example, is useful for comparing capital-intensive businesses but misleading for service businesses that need few physical assets. A large business can make a loss in a bad year, and a small business can be highly profitable.