Business Finance Key Terms: Revenue, Costs, Profit Margins & Ratios

Revenue (Sales / Turnover)

Revenue = Selling price per unit × Number of units sold

Total Variable Costs

Total variable costs = Variable cost per unit × Number of units sold

Total Costs

Total costs = Fixed costs + Variable costs

Contribution per Unit

Contribution per unit = Selling price per unit − Variable cost per unit

Total Contribution

Total contribution = Contribution per unit × Units sold OR Total revenue − Total variable costs

Break-even Output

Break-even output = Fixed costs ÷ Contribution per unit

Margin of Safety

Margin of safety = Actual output − Break-even output

Market Share (%)

Market share = (Sales of a product ÷ Total market sales) × 100

Market Growth (%)

Market growth = (Change in market size ÷ Original market size) × 100

Added Value

Added value = Sales revenue − Cost of bought-in goods and services

Capacity Utilisation (%)

Capacity utilisation = (Actual output ÷ Maximum possible output) × 100

Unit (Average) Cost

Average cost per unit = Total costs ÷ Number of units produced

Price Elasticity of Demand (PED)

PED = % change in quantity demanded ÷ % change in price

Income Elasticity of Demand (YED)

YED = % change in quantity demanded ÷ % change in income

Market Capitalisation

Market capitalisation = Number of issued shares × Current share price

Gross Profit

Gross profit = Revenue − Cost of sales

Operating Profit

Operating profit = Gross profit − Operating expenses

Gross Profit Margin (%)

Gross profit margin = (Gross profit ÷ Revenue) × 100

Operating Profit Margin (%)

Operating profit margin = (Operating profit ÷ Revenue) × 100

Profit for the Year (Net Profit Margin)

Profit for the year margin = (Profit for the year ÷ Revenue) × 100

Return on Capital Employed (ROCE %)

ROCE = (Operating profit ÷ (Total equity + Non-current liabilities)) × 100

Current Ratio

Current ratio = Current assets ÷ Current liabilities

Acid-test (Quick) Ratio

Acid-test ratio = (Current assets − Inventory) ÷ Current liabilities

Gearing (%)

Gearing = (Non-current liabilities ÷ (Total equity + Non-current liabilities)) × 100

Payables Days

Payables days = (Payables ÷ Cost of sales) × 365

Receivables Days

Receivables days = (Receivables ÷ Revenue) × 365

Inventory Turnover

Inventory turnover = Cost of goods sold ÷ Average inventories held

Payback Period

Payback = Time taken for cumulative cash flows to match initial investment

Average Rate of Return (ARR %)

ARR = (Average annual profit ÷ Initial investment cost) × 100

Net Present Value (NPV)

NPV = Present value of future cash inflows − Initial investment cost