profitability

profit

• key measure of businesses success,

• however, as single figure profit tells little abt business performance, have to compare to sales and investment required to generate that profit.

gross profit margin

• useful to analyse how business performed in terms of direct trading activity

• helps business answer “have our products been successful”

• limit= doesn’t take into account indirect costs

• calculation= gross profit/sales revenue X 100

operating profit margin

• takes into account performance of a business more fully, as takes in account direct and indirect costs

• useful alongside gross profit margin

• calculation= operating profit / sales revenue X 100

profit for the year margin

• ratio takes in account all revenue and costs incurred by business

• good measure of how effective business performed over financial year

• ratio used to identify potential to pay a dividend to shareholders

• calculation= profit for the year / sales revenue X 100

using financial data to make business decisions

• budgets and cash flow forecasts are important when making start-up decisions and attracting investment

• break-even analysis can be used to answer ‘what if” senarios

• return on investment analysis can be used to compare projects for potential investments

• profitability ratio can be used to analyse what parts of the business are running effectively and where improvement is needed

• financial info is very important in decisions bc all designs must be financially viable. however, must also take in account issues behind numbers, eg financial info wont take in account human or ethical factors.