2.4: making financial decisions

• what is gross profit?

  the revenue a company earns from sales after deducting the direct costs of producing and selling its goods or services
• gross profit


  sales revenue - cost of sales
• what is gross profit margin?

  the percentage of your sales income left after you've paid for products you've sold or services you've provided
• gross profit margin (%)

  (gross profit / sales revenue) x 100
• what is net profit?

  profit shown after all expenses have been deducted from sales
• net profit


  gross profit - other operating expenses and interest
• what is net profit margin?

  the percentage of profits that you keep after all expenses are paid
• net profit margin (%)

  (net profit / sales revenue) x 100
• what is average annual profit?

  the total profit earned over a period (e.g. business's lifespan or an investment's duration) divided by the number of years in that period
• average annual profit


  total profit / number of years
• what is average rate of return (ARR)?

  the average amount of cash that an investment will yield over a period of time
• average rate of return (ARR) (%)

  (average annual profit / cost of investment) x 100