Understanding business performance

• Businesses have access to a lot of numerical information, also called quantitative information, which is used to make business decisions
• Quantitative research in business explains phenomena by collecting numerical data, which is then analyzed using mathematically based methods
• Businesses use internal documents like sales reports and financial documents, as well as external sources like government statistics, to gather information for decision-making
• To interpret this information, businesses need to be able to read and understand charts and graphs, which can present data in various ways
• Charts are used to present information in the form of a graph, diagram, or table, including types like pie charts, bar charts, pictograms, and infographics
• Graphs illustrate relationships between variables and are often plotted on two axes, vertical and horizontal
• When extracting information from charts and graphs, it's important to identify trends, check scales on axes, be aware of units or percentages, read the chart title and labels, and double-check for correct interpretation
• Financial data is crucial for assessing the performance of a business and includes:

  • Costs and revenues
  • Gross and net profit
  • Profit margins
  • Cash flow
  • Break-even point
  • Average rate of return
• Total costs are calculated by adding total fixed costs and total variable costs together, representing all the costs of the business when producing a certain level of output
• Revenue is the income earned by a business over a period of time from selling its goods or services
• Gross profit is the difference between sales revenue and the cost of making the product sold
• Net profit is calculated by deducting all expenses away from gross profit
• Profit margins, expressed as a percentage, help a business understand changes in profit levels by comparing to previous figures or competitors
• Cash flow forecasting is crucial for a business to decide what it can afford to do
• Break-even point is where the business is not making a profit or a loss, helping in decisions about which products to make
• Average rate of return calculation helps a business compare the profitability of different choices over the expected life of an investment
• Using financial data involves percentages and percentage change calculations to see trends and make comparisons, aiding in decision-making and communication with shareholders or lenders
• Limitations of financial data include:

  • It is always out of date as it can only be used after being collected
  • It cannot predict the future
  • Different interpretations can lead to different conclusions
  • Financial success is not the only indicator of business success
• Marketing data can provide a variety of quantitative and qualitative information, often coming from market research, which can be used to obtain both primary and secondary data
• Primary research data can provide qualitative or quantitative data, being particularly useful for collecting detailed information about customer preferences and buying behavior
• Secondary research data is valuable for obtaining quantitative data about the market a business operates in, such as total sales value or market growth, aiding decisions on product development or investment
• Marketing data can offer sales forecasts and promotional plans that impact various areas of a business, requiring coordination between departments to meet anticipated sales increases
• Market data refers to information about the characteristics that make up a particular market, including economic and demographic factors
• Economic factors include consumer incomes, exchange rates, interest rates, inflation rates, and unemployment rates
• Businesses must consider changes in economic factors as they can affect customer purchasing decisions and business operations
• For example, an increase in inflation may lead to higher costs for a business, which must then decide whether to pass on these higher costs to customers
• Demographic factors, related to the composition of the population, are useful for business decision-making as they can inform about changes in population size, migration, and population structure
• An ageing population, where the proportion of older people increases relative to the proportion of younger people, would influence the decisions made by a business that produces babywear, as it may expect sales to fall as a result
• Ways to measure the performance of a business include changes in costs, revenue, gross profit, net profit, gross profit margin, and net profit margin
• Gross profit is the difference between sales revenue and the cost of making the product sold
• Net profit is calculated by deducting all expenses away from gross profit
• Gross profit margin is the percentage of sales revenue left once the cost of sales has been paid
• Comparable data is crucial when analyzing the performance of a business, as different businesses might have different accounting periods and policies
• Interpreting the performance of a business can vary depending on how the information from its accounts is used
• In the case of a large supermarket chain, an increase in sales revenue by 20% doesn't necessarily indicate improved performance if the net profit margin has decreased, possibly due to increased overhead costs related to opening new stores
• Businesses make decisions using accurate, sufficient, and up-to-date information
• Accurate information used for decisions needs to be complete to avoid incorrect business decisions
• Sufficient data, especially financial, needs context like historical data or data from similar businesses to be meaningful
• Information must be kept up to date to remain relevant, as significant market changes can make data less useful
• Even when information is accurate, sufficient, and up to date, its use may have limitations, like the average rate of return not considering the effects of inflation on cash value