Business Calculations

Profit

The reward for the risk that entrepreneurs take in providing a product/service

Gross profit

Takes into account the expenses directly incurred in the cost of production and is calculated as follows

Net profit

takes into account all of the business expenses and is calculated as follows

Profit margin

The amount by which sales revenue exceeds the costs. Higher profit margins are preferable, as it means that more revenue is being converted to profit.

Gross profit margin

Shows the proportion of revenue that’s turned into gross profit and is expressed as a percentage. It shows the proportion of revenue left over after the business has paid for its costs of sales.

Net profit margin

Shows the proportion of revenue that’s turned into net profit before tax and is expressed as a percentage. The proportion of revenue left over after the business has paid all of the costs.

The average rate of return (ARR)

measures the profit from a proposed capital project. Is used when a decision is required about which of two projects should be pursued in order to generate the most profit.

The Advantages & Disadvantages of Using the Average Rate of Return (ARR)

• Considers all of the net cash flows generated by an investment overtime

• It’s easy to understand and compare the percentage returns with each other

• As it depends on an average of cash flows, it ignores the timing of those cash flows

• The opportunity cost (the loss of other alternatives when one alternative is chosen) of the investment is ignored

Sales volume

The number of products sold i.e. the physical number of units sold

Sales revenue = price x quantity sold i.e. the financial value of the units sold

The market share that a business enjoys is…

the proportion of the total sales revenue of a product/service compared to the market as a whole

Market Share

Market share if a business sells multiple items