2.4- making financial decisions Flashcards
What is the formula for average annual profit?
average annual profit= total profit/ number of years
what is the formula for average rate of return?
Average rate of return= (average annual profit/cost of investment) x 100
why is it good to have a big annual rate of return?
The bigger the ARR for an investment, the more successful the investment for the business
what is the formula for gross profit?
Gross profit= revenue- cost of sales
what is the formula for net profit?
Net profit= gross profit- (operating expenses+ interest)
what is the formula for gross profit margin?
Gross profit margin= gross profit/sales revenue x 100
how can you improve gross profit margin?
Increasing prices or reducing the direct cost of sales
The higher the percentage the better
How do you cook calculate net profit margin?
net profit margin= net profit/ sales revenue x100
Why is net profit margin often larger for new companies?
they are still small and don’t have many indirect costs
As businesses grow these costs go up and net profit margin decreases
But the higher it is the better
How can financial data be used to help a business make decisions?
Cash flow forecast can show whether or not a business decision would lead to cash flow problems
Calculations of profit and loss can help a business see if it should reduce costs or try to increase revenue
Predicting the average rate of return of an investment can help a business to determine if an investment would be worthwhile
how can businesses use marketing data to inform business decisions?
primary and secondary market research data can give an indication of how customer preferences are changing over time
Businesses can use the data to see if a business decision is likely to lead to increase sales
how can market data be used to inform business decisions?
Knowing the market share of different businesses, the costs of supplies and prices of competitor products may help a business to see if it should know its prices or reduce the cost of it supplies
what is the limitation of using financial data to compare to different sources of data?
It may not be possible to directly compare two different sources of data for example one firm in the comparison may be much larger or operate in a different country
Why is it hard to tell what has caused the firms financial performance to change?
There are often lots of different variables which may affect a companies financial performance such as how well the economy is doing
What is another limitation to using financial data to assess business performance?
it only includes quantitative data and not qualitative data
qualitative data can include things like customers opinions which can be useful for determining what changes the business should make
