Analysing financial performance

• ARR - Average rate of return


  Compares the average yearly profit from an investment with the cost of the investment and is stated as a percentage

  ARR = average yearly profit x 100 / cost of investment
• Break even is the level of production at which a businesses total costs and revenue from sales are equal.
• A break even chart shows a businesses costs and revenues and the level of production needed to break even

  
• The margin of safety measures the amount by which a businesses current level of production exceeds its break even level of output

  
• Advantages of break even analysis

  • Shows the effects of a change in prices
  • Shows the effects of a change in costs
  • Helps the bank judge whether its loan will be repaid or not
• Disadvantages of break even analysis

  • Assumes that a business sells all of the output it produces
  • May be inaccurate due to the speed at which markets change
• An income statement is a financial statement showing a businesses revenues and costs and thus its profit or loss over a period of time
• A statement of financial position sets out the assets and liabilities that a business has on a particular day
• Gross profit = Revenue - Cost of sales (over a period of time - usually a year)
• Net profit = Revenue - (Cost of sales + Overheads and any other costs)
• A liability is a sum of money that is owed by a business to another business or an individual
• Net profit margin = net profits x 100 / revenue
• Gross profit margin (GPM) = gross profits x 100 / revenue