2.4

• What does ARR stand for in business calculations?

  Average Rate of Return
• How is the return on an investment defined?

  It is the profit or loss proportionate to investment
• What does the average rate of return (ARR) represent?

  It calculates average return over investment lifespan
• How do you calculate average annual profit?

  Divide total profit by number of years
• What is the formula for calculating ARR?

  ARR = (average annual profit / cost of investment) x 100
• How do you find the average annual profit from the total profit?

  Divide total profit by 5 years
• Why are profit forecasts useful for businesses?

  They predict future ARR for investment decisions
• What does a higher ARR indicate for an investment?

  It suggests a more successful investment
• Why might a 6% ARR be significant for a £1 million investment?

  It represents a substantial return on that amount
• What are the two types of profit a business needs to know?

  Gross profit and net profit
• What is gross profit?

  Profit after cost of making products is deducted
• What is net profit?

  Profit after all expenses are deducted
• How is revenue calculated?

  Revenue = sales price x quantity sold
• How do you calculate gross profit?

  Gross profit = revenue - cost of sales
• What is the formula for calculating net profit?

  Net profit = gross profit - (operating expenses + interest)
• What is the gross profit for the lamp business?

  £37,800
• What is the net profit for the lamp business?

  £20,300
• What does gross profit margin indicate?

  Fraction of sales not spent on production
• How is gross profit margin calculated?

  Gross profit margin = (gross profit / sales) x 100
• What was the gross profit margin for Yomono Chocolates?

  92.8%
• What does net profit margin represent?

  Fraction of sales the company retains as profit
• How is net profit margin calculated?

  Net profit margin = (net profit / sales) x 100
• What was the net profit margin for Yomono Chocolates?

  10%
• Why is it important to know the fraction of income that goes into costs?

  It helps assess business profitability and efficiency
• What types of data do businesses collect?

  Financial, marketing, and market data
• How can cash flow forecasts assist businesses?

  They show potential cash flow problems from decisions
• What can profitability ratios help a business determine?

  If they should reduce costs or increase revenue
• How can market data assist businesses?

  It helps decide on pricing and supply costs
• What is a limitation of using financial data?

  It only includes quantitative, not qualitative data
• Why might comparing financial data be challenging?

  Different firms may have varying sizes and contexts
• What can affect a company's financial performance?

  Various variables, including economic conditions
• Why is qualitative data important for businesses?

  It provides insights into customer opinions and preferences
• What are the key components of calculating ARR?

  • Total profit calculation
  • Average annual profit calculation
  • ARR formula: (average annual profit / cost of investment) x 100
• What are the differences between gross profit and net profit?

  • Gross profit: profit after cost of sales
  • Net profit: profit after all expenses
• What are the implications of gross profit margin and net profit margin?

  • Gross profit margin: fraction of sales not spent on production
  • Net profit margin: fraction of sales retained as profit
• How can businesses use data to make decisions?

  • Track performance
  • Predict effects of decisions
  • Inform on profitability and market trends
• What are the limitations of financial data?

  • Difficulty in comparing different firms
  • Excludes qualitative data
  • Variables affecting performance are numerous