Business GCSE topic 2.4 - Making financial decisions

Gross profit formula

SR - VC (Cost of sales)

What does gross profit tell us

company's profitability and efficiency

Net profit formula

• SR - TC

  or

• GP - FC (Operating expenses and interest)

What does net profit tell us

examining a company's net profit over time to assess its financial performance and profitability

Net profit margin formula

Net profit/Sales Revenue x 100

Gross profit margin formula

Gross profit/Sales Revenue x 100

Ways to improve the gross profit margin

• Lowering cost of sales

• Increasing revenue

How to increase revenue

• Lower selling price to increase demand

• Increase price may also increase revenue

• Increase product awareness but may also increase operating expenses

How to lower cost of sales

• Cutdown on price → Paid to suppliers through negotiating with existing suppliers

• Go to cheaper suppliers

• Review existing products and analyse whether they should be made more cheaply

Business investment

When money is used to purchase an asset that’s expected to generate a return or profit

Things a business can invest in

• Land

• Machinery

• Vehicles

Average rate of return

Quantitative method of deciding whether an investment is likely to be worthwhile

Average rate of return formula

Average annual profit/Cost of investment x 100

Effect of having a high ARR

Investment will generate a higher return on money spent on investment

Ways to measure financial performance

• Pie charts

• Line graphs

• Bar graphs

Ways to understand business performance

• Financial data

• Marketing data

• Market data

Financial data

• All businesses must produce a financial statement report every year

• Important to anyone who’s considering investing money in the business

• Can be compared year on year to see how the business is doing

Marketing data

• Results of marketing research responses to questionnaires may be gathered as quantitative data

• Helps business to make decisions

Market data

• Electronic streaming of prices, volumes related info used for trading shares on the stock market around the world

• PLC’s will be interested to see how their share price is doing and if their own competitors shares are going up or down

Owners and managers purpose of making business decisions

Use financial info to make important long term decisions for the business

Suppliers purpose of making business decisions

Use info to see if business is creditworthy

Bank’s purpose of making business decisions

Use financial info of a business to see if they’ll lend more money in the future

Government’s purpose of making business decisions

HMRC look at financial info to see if correct tax amount has been paid

Limitations of financial statements

• Subject to human error

• Only discuss financial info but doesn’t account social or environmental factors

• Info published by a business is open to interpretation so lots of people can read it and can think different things