BUSINESS Theme 2:2.4-Financial decisions

  • Created by: Eiman.123
  • Created on: 28-01-21 14:42

Gross and net profit & gross and net profit margin

Gross profit=firm makes AFTER the cost of making products ('cost of sales') is taken into account. 

Gross profit=revenue-cost of sales

Net profit=profit a firm makes when ALL EXPENSES-rent, salaries, interest on loans and cost of sales are taken into account

Net profit=gross profit-(operating expenses + interest) 

Gross profit margin: % of sales revenue left when cost of sales are paid

Gross profit margin=gross profit/sales revenue x 100

Net profit margin: propotion of revenue left after all costs are paid

Net profit margin=net profit/sales revenue x 100

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Average rate of return and business data

Average rate of return=profitabiliry of an investment

ARR % = Average annual profit/cost of investment x 100

To calculate average annual profit=total profit/no of yrs

Before a business makes a decision, it may look at different data types to make it aware of the impact of the decision. Businesses use:

FINANCIAL DATA: E.g-cash flow forecasts alert business of any potential cash flow problems calculations on profit and loss help it see if it should lower cost or try increase revenue. Predicting ARR helps them deduce if an investment is profitable enough

MARKETING DATA: Business understands customers and their preferences through primary and secondary market research

MARKET DATA: E.g-knowing market share of different businesses, prices of competitors products means business decides if they should lower price/ increase market share

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Limitations to financial data

When a business is using financial data, it's important that it compares it with another suitable source. E.g-comparing net profit for two similar businesses like Netflix and Amazon Prime

But sometimes financial data isn't really able to be comparable if the businesses are different in terms of if they are established/working in another country. This makes it more difficult to determine a business' performance

Another reason financial data is limited is because when comparing a business' financial performance over a set period, it might be hard to understand what caused changes as other variables can affect them e.g-how the economy is doing or customer's tastes

Financial data only includes qualitiative data and not quantitative. Quantitative is important as it reflets customer's opinion which is vital for a business to determine changes it should make

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