Explain what profit and loss mean, calculate simple profit or loss from sales and costs, and explain why profit matters to a business

What this dot point is asking

You need to explain what profit and loss mean, work out a simple profit or loss from sales and costs, and explain why profit matters to a business. The key formula is profit equals sales minus total costs. Keep your answer practical: be able to add up costs, do the subtraction, say whether the result is a profit or a loss, and show a loss in brackets.

The answer

What profit and loss mean

Profit is the money left over when a business's sales are greater than its costs. It is the reward for running the business.

Loss is when a business's costs are greater than its sales, so it has spent more than it earned. A loss is shown in brackets in money records, for example (200).

The profit formula

The simple formula is:

• If sales are greater than total costs, the answer is positive: a profit.
• If sales are less than total costs, the answer is negative: a loss, shown in brackets.

Working out total costs first

Before you can find profit, add up all the costs. For example, if a cafe pays rent, wages, and ingredients, total costs is the three added together. Then subtract total costs from sales.

A worked profit and loss

Here is a simple profit or loss for two weeks of a stall. A loss is shown in brackets.

In Week 1, sales of 800 dollars minus costs of 500 dollars give a profit of 300 dollars. In Week 2, sales of 600 dollars minus costs of 700 dollars give a loss of 100 dollars, shown as (100) because costs were greater than sales.

Why profit matters

Profit matters because it:

• Rewards the owner for their work and risk.
• Keeps the business going - profit can be used to pay for new stock, repairs, or growth.
• Shows the business is healthy - steady profit means it is doing well.
• Helps it survive - a business that keeps making losses will run out of money and may have to close.

A business that makes a loss must act: raise sales or cut costs, or both.

Turning a loss into a profit

To turn a loss into a profit, a business can:

• Increase sales - attract more customers, sell more, or raise prices a little (if customers will still buy).
• Reduce costs - find cheaper suppliers, cut waste, or reduce staff hours in quiet times.

Either raising income above total costs or cutting costs below sales turns a loss into a profit.

Examples in context

Example 1. A bubble-tea stall in a good week. The stall has sales of 1,000 dollars and total costs (rent, ingredients, wages) of 700 dollars. Profit equals 1,000 minus 700, a profit of 300 dollars. The owner uses this profit to buy more stock and save toward a second machine, showing how profit lets a healthy business grow.

Example 2. A new cafe in a slow month. A new cafe has sales of 4,000 dollars but total costs of 4,500 dollars, giving (500), a loss of 500 dollars. The owner reacts by running a lunch promotion to raise sales and switching to a cheaper supplier to cut costs. The next month sales rise and costs fall, turning the loss into a profit, showing why acting on a loss matters.

Try this

• Cue. A stall has sales of 900 dollars and total costs of 600 dollars. Work out the profit and show your working. Use profit equals sales minus total costs, then state clearly whether it is a profit or a loss.

• Cue. A shop has sales of 700 dollars and costs of rent 400, stock 200, and bills 200. Work out total costs, then the profit or loss, showing a loss in brackets. Add the costs first, subtract from sales, and present a loss as a bracketed figure.

• Cue. A cafe is making a loss. Suggest two ways it could turn this into a profit. Think about raising sales (a promotion or more customers) and cutting costs (cheaper supplies or fewer staff hours in quiet times).