2.4

• Gross profit


  The difference between money received from selling goods and services and the cost of making or providing them

  
  

  Sales revenue - cost of sales (variable costs)
• Net profit


  Difference between amount of money received from selling goods and services and all of the costs incurred.

  
  

  Gross profit - other expenses and interests
• Profit margin


  The sales revenue expressed as a percentage of total cost
• Gross profit margin


  The perfect age of sales revenue that is left once the cost of sales have been paid.

  Gross profit margin (%) = gross profit/sales revenue x 100
• Using gross profit margin


  Can be useful for a business, eg if sales revenue triples between years but gross profit doubles, the business can investigate why
• Net profit margin


  The percentages of sales revenue remaining after all costs have been paid

  
  

  Net profit margin = net profit / sales revenue x 100
• Using net profit margin

  - Comparing the net profit margin with the gross profit margin - By comparing the net profit margin with the gross profit margin for the same time period, a business can identify how significant its fixed costs, or

  overheads are.

  - Comparing net profit margins over time - By comparing net profit margins over time, a business can identify what is happening to its costs.
• Average rate of returns (ARR)

  Way of comparing the profitability of different choices over the expected life of an investment.
• ARR formula

  
• Use of cost and revenue

  A business should be aware of what is happening to its total costs and revenues and how well it is able to control them. This makes it easier to forecast what might happen in the future.
• Use of gross and net profit


  Identifying what is happening to costs and revenues enables a business to calculate how this might affect both gross profit and net profit using historical profit information.
• Use of profit margins


  Profit margins can be calculated and compared either to the business' previous figures or to competitors' figures.
• Uses of cash flow


  Businesses need access to cash in order to survive. Accurately forecasting the cash flow in and out of a business is crucial when deciding what a business can and cannot afford to do.
• Uses of break even

  Knowing the break-evenpoint in the business' output is important when making decisions about which products to make. It can help a business to avoid making unprofitable products.
• Uses of ARR


  This helps the business to identify the most profitable options.
• Benefits of using financial data

  Making use of financial data often requires the use of percentages and percentage change calculations over time. This enables a business to see trends and make comparisons, which can be helpful when making decisions. In addition, this data can be used to communicate with shareholders
• Limitations of using financial data

  Financial data can only be used after it has been collected, meaning that it is always out of date. While it can give insights into how a business has performed, it cannot predict the future. Business owners must take this into consideration when using company accounts to make big decisions.

  When making decisions, a business owner should ensure that they are using a sufficient time period of information and a wide range of sources.

  
  

  Another limitation of financial data is the fact that statistics and data can be interpreted differently using different methods, which can lead to different conclusions being drawn. For example, '90 per cent of customers were satisfied with the service' could be interpreted as 'one in every ten customers is not satisfied with the service'.

  
  

  it only shows how successful a business is in financial terms. Financial success is not the only indicator of business success.
• Economic factors


  Consumers income, purchasing power, inflation, recession, unemployment rates
• Demogrphic factors


  The composition of the population. Demographic data is useful for business decision-making as it can tell businesses about changes in population size, migration and population structure.
• Ways of measuring business performance

  - Changes in costs

  - Changes in revenue

  - Gross profit

  - Net profit

  - Gross profit margin

  - Net profit margin
• It is important that information used is:

  - Accurate - Information used to make decisions needs to be accurate and complete. Inaccurate or incomplete information is likely to lead to incorrect business decisions being made. The consequences of this could be serious, potentially leading to a business failing.

  - Sufficient - One set of data, particularly financial data, can be meaningless unless put into context. This might mean comparing it with historical data or data from similar businesses.

  - Up to date - Information needs to be kept up to date to ensure that it remains relevant. It is not just the passing of time that makes information go out of date. Any significant changes in the market can make data less useful.