A Level Business - Human Resources (Unit 6) and Profitability Measures

Flashcards covering key concepts from Unit 6 related to business financial performance and profitability measures, including definitions, formulas, and interpretations of financial ratios.

What is the fundamental purpose of profitability measures in a business?

To assess the financial performance of a business by comparing profits achieved to another variable, such as revenue.

What is the formula to calculate Gross Profit?

Sales Revenue - Cost of Sales

How is Operating Profit determined?

Gross Profit - Expenses

What is the final profit measure that accounts for interest and taxation?

Profit for the Year, calculated by Operating Profit - (Interest + Taxation).

Name the three main profitability ratios used to measure financial performance.

Gross Profit Margin, Operating Profit Margin, and Profit for the Year Margin.

What is the formula for calculating the Gross Profit Margin (GPM)?

(Gross Profit / Sales Revenue) * 100

If a firm's Gross Profit Margin (GPM) is low or falling, what might it indicate?

The firm is not managing its cost of sales effectively, or its sales are in decline.

Provide the formula used to calculate the Operating Profit Margin (OPM).

(Operating Profit / Sales Revenue) * 100

How is the Profit for the Year Margin (PFYM) calculated?

(Profit for the Year / Sales Revenue) * 100

What does a low or falling Profit for the Year Margin suggest about a business?

Gross profit or operational profit might be in decline, or interest rates have changed.

What specific internal factors might lead to a decline in operating profitability?

Wages may be increasing, or overheads are going up.