Making financial decisions

What is gross profit margin?

The difference between sales revenue and total costs expressed as a percentage

How do you calculate gross profit margin?

Gross profit divided by sales revenue x by 100

What does net profit margin represent?

The proportion of sales revenue left once all costs have been paid

How do you calculate net profit margin?

Net profit divided by sales revenue x by 100

What is the average rate of return used for?

Comparing the profitability of different investments over their expected life

How is average rate of return calculated?

Average annual profit divided by cost of investment x by 100

What types of numerical information do businesses have access to?

Quantitative information

Where can businesses find quantitative information?

Internal documents like sales reports and financial documents, and external sources like government statistics

Why do businesses need to interpret charts and graphs?

To use the information effectively

What should be identified when extracting information from charts and graphs?

Trends shown by the graph or chart

What should be checked on the axes of charts and graphs?

The scales used

What should you be aware of when reading data on charts?

Whether the data shows units, percentages, or percentage change

What should be read to understand a chart better?

The chart title and any labels used

Why is financial information important for business decisions?

It helps identify what options a business can afford

Why should businesses be aware of their total costs and revenues?

To forecast what might happen in the future

How does knowing costs and revenues help with profits?

It enables calculation of how gross profit and net profit might be affected

What can profit margins help a business understand?

What is causing any change in profit levels

Why is cash flow forecasting crucial for businesses?

Because businesses need access to cash to survive and to decide what they can afford

What is the importance of knowing the break-even point?

It helps avoid making unprofitable products

Why do businesses calculate average rate of return?

To compare expected returns and identify the most profitable investment options

What is a limitation of financial data?

It is always out of date and cannot predict the future

Why should business owners use data from multiple years?

To make more informed decisions using a sufficient time period

What additional information complements financial data?

Market trends and competitor activities

How can different interpretations of data affect decisions?

They can lead to different conclusions being drawn

What is one example of different interpretations of customer satisfaction data?

‘90% satisfied’ could also mean ‘one in ten customers is not satisfied’

What is a limitation of using financial data to measure business success?

It only shows financial success and ignores other indicators like environmental or ethical aims

What is market data?

Information about the characteristics that make up a particular market including economic and demographic factors

What does demographic data provide for businesses?

Information about population size, migration, and structure

What are some ways to measure business performance?

Changes in costs, revenue, gross profit, net profit, gross profit margin, and net profit margin

Why must care be taken when comparing performance between businesses?

Because of different accounting periods and policies

What qualities should business information have?

Accuracy, sufficiency, and being up to date

Why is accuracy important in business data?

Because data can be meaningless without context such as historical data or comparisons