Revision and practice on the different types of profit a business reports, how to calculate them, and the difference between profit and cash.
Key vocabulary: Revenue, Gross Profit, Operating Profit, Profit for the Year
Key Concepts
Understanding Profit
When people discuss business, they often talk about "profit" as if it's a single number — but larger businesses report profit in several different ways. The three main types are:
Gross profit: revenue minus cost of goods sold — profit before deducting operating and finance costs.
Operating profit: gross profit minus operating expenses — profit from the core business, before finance costs and tax.
Profit for the year (profit after tax): net profit after deducting interest, tax and exceptional items — the profit attributable to shareholders.
Profit for the year = Operating profit − Finance costs + Finance income − Tax.
Each type of profit can also be expressed as a margin — a percentage found by dividing that profit figure by revenue and multiplying by 100 (e.g. Gross profit margin = (Gross profit ÷ Revenue) × 100). Margins are often more useful than the raw profit figures for comparing performance over time or between businesses, because they show profitability relative to size, making trends easier to spot.
Profit vs Cash
Profit and cash are different things, based on when money actually enters or leaves the business.
Cash is the money in the business's bank account each day, used to pay for things like raw materials and staff. It's only counted when it actually arrives or leaves the account.
Profit can be counted as soon as a sale is made, even before the money has physically arrived. For example, a card sale of £50 might be recorded as revenue (and so profit) on the day of sale, while the actual cash inflow only reaches the business's bank account a couple of days later once the card payment clears.
This is why a business can be profitable on paper but still run into cash flow problems — a topic covered in more depth later in this unit.
What Is an Income Statement?
An income statement — also called a "statement of comprehensive income" or a "profit and loss statement" — is a financial statement that shows a business's revenue, costs and profit over a 12-month period. It's built up in stages, moving from revenue down through cost of goods sold, operating expenses, and finance costs/tax, to arrive at each of the profit figures above in turn.
Real-World Case Studies
Ocado — strong gross profit, but still an overall loss
Ocado Retail reported gross profit of £952 million for its 2025 financial year, up 14.1% on the year before. But at group level, Ocado still reported a loss before tax from continuing operations of £377.6 million, similar to the £339.8 million loss the year before. This is a clear real-world example of why gross profit alone doesn't tell you whether a business is actually profitable — Ocado's heavy operating expenses and finance costs (including investment in its automated warehouse technology) mean a healthy gross profit can still turn into a loss further down the income statement.
Source: verified via search, September 2026 — Ocado Group's own Full Year Results 2025 and Retail Insight Network's coverage of Ocado Retail's FY25 results.
Marks & Spencer — profit improving at every level
In the year to March 2025, M&S reported an improved gross margin, driven by better buying and favourable currency movements, alongside a rise in operating profit — up to £484.1 million for its Food division and £475.3 million for Fashion, Home & Beauty, both ahead of the previous year. Profit before tax rose 22.2% to £875.5 million, its highest level in over 15 years. Unlike a business narrowing losses, M&S's results show profit converting cleanly from gross profit through to the bottom line, across more than one part of the business.
Source: verified via search, September 2026 — Marks & Spencer's own Full Year Results announcement for the 52 weeks ended 29 March 2025.
Quick Quiz
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1. A business has revenue of £500,000 and cost of goods sold of £320,000. What is its gross profit?
2. Which figure is calculated by taking gross profit and subtracting operating expenses?
3. A customer pays by card on Monday, but the money reaches the business's bank account on Wednesday. When is the sale recorded as profit?
4. Why might a business prefer to compare profit margins rather than raw profit figures between two years?
5. Which financial statement shows a business's revenue, costs and profit over a 12-month period?
Score: 0 / 0
Quick Knowledge Check
Short, snappy recall questions — tap to reveal the answer.
What is gross profit? (1 mark)
Revenue minus cost of goods sold.
What is operating profit? (1 mark)
Gross profit minus operating expenses.
Why can a profitable business still run short of cash? (1 mark)
Profit is recorded when a sale is made, but cash may not arrive until later.
Key Term Flashcards
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Gross profit
Revenue minus cost of goods sold — profit before operating and finance costs are deducted.
Operating profit
Gross profit minus operating expenses — profit from the core business, before finance costs and tax.
Profit for the year
Net profit after deducting interest, tax and exceptional items — the profit attributable to shareholders.
Profit margin
A profit figure expressed as a percentage of revenue — makes it easier to compare profitability over time or between businesses.
Income statement
A financial statement showing a business's revenue, costs and profit over a 12-month period — also called a profit and loss statement.
A*/A Stretch
Examiner's eye
Always name the specific type of profit in your answer (gross, operating, or profit for the year) rather than just saying "profit" — examiners reward precision, and mixing up gross and operating profit is one of the most common mistakes in this topic.
Synoptic link
Connecting to financial objectives (L1, this unit): A business with a "profit objective" needs to specify which type of profit it means. A retailer might set a gross profit margin target to manage buying and pricing, while a growth-focused start-up might tolerate a low or negative operating profit for years, so long as gross profit is healthy and improving.
Try This With AI
Before using this: AI tools can get facts or mark scheme details wrong, and quality varies by tool. Always check anything factual against your notes or ask your teacher.
Give me a short set of figures for a fictional business (revenue, cost of goods sold, operating expenses, finance costs, tax). Ask me to calculate its gross profit, operating profit and profit for the year, plus each margin. Then mark my working and tell me if I've shown the correct method, not just the correct final numbers.