2.4

• gross profit

  the amount a firm makes after the direct costs of making and selling its product or providing its services, also known as its cost of sales, are deducted from its revenue
• gross profit = sales revenue - cost of sales
• net profit

  the profit the business generates after all other operating expenses and interest not included in the calculation of gross profit have been paid
• net profit = gross profit - other operating expenses and interest
• ratio analysis

  reviewing the gross and net profit figures to inform business owners and managers how much profit a business has made in a specific time period, which helps to make decisions
• gross profit margin = (gross profit / sales revenue) x 100
• Ways to improve gross profit margin:

  • Increase sales revenue: lowering price increases demand, increasing price generates more revenue, increased product awareness may generate more revenue but also increases costs
  • Lower cost of sales: renegotiating with existing suppliers, changing suppliers, reviewing existing products and seeing if they could be made more cheaply to cut costs
• net profit margin = (net profit / sales revenue) x 100
• Ways to improve net profit margin:

  • Increase sales revenue: lowering price increases demand, increasing price generates more revenue, increased product awareness may generate more revenue but also increases costs
  • Lower cost of sales: renegotiating with existing suppliers, changing suppliers, reviewing existing products and seeing if they could be made more cheaply to cut costs
  • Lower non direct expenses: delayer organisational structure, review salary structure/bonuses, freeze recruitment, move to cheaper location
• Types of Business Investment:

  • Land and building
  • Machinery
  • Vehicles
• average rate of return

  a quantitative method of deciding whether an investment is likely to be worthwhile (expressed as %) - the higher, the better
• average rate of return = (average annual profit / cost of investment) x 100
• An investment decision will be based on:

  • Type and reasons for the investment
  • Risk attached
  • Current rate of interest
  • How reliable the figures are (remember they are predictions!)
• Businesses will regularly use quantitative data to understand:

  • The performance of the business
  • The market it operates in
• Examples of Financial Data from Theme 1:

  • Profit/loss: internal source of finance (retained profit)
  • Break even: important for new business startups to determine
  • Cash flow forecast: will predict if a business is likely to have shortfalls of cash
• marketing data

  includes a business's internal data such as data on sales figures, marketing spend and primary market research
• market data

  generally available through secondary data for the industry concerned and includes things such as income levels and employment information
• market share?

  the percentage share of the total market that is owned by a particular business, product or brand
• market share = (business or product sales / total sales in the market) x 100