Topic 2.4 Making Financial Decisions Flashcards
formula for gross profit
Gross profit = Sales revenue - cost of sales
gross profit
the difference between the revenue of the business and the variable costs
net profit
the difference between revenue and total costs
net profit formula
Net profit = Gross profit - (operating expenses + Interest)
profit margin
A profit margin is the amount by which the sales revenue exceeds the costs
gross profit margin
This shows the proportion of revenue that is turned into gross profit and is expressed as a percentage
gross profit margin formula
gross profit margin (%) = 100 x gross profit/sales revenue
net profit margin
The net profit margin shows the proportion of revenue that is turned into net profit before tax and is expressed as a percentage
net profit margin formula
net profit margin (%) = 100 x net profit/sales revenue
average rate of return (ARR)
The average rate of return (ARR) measures the annual expected profit from a proposed capital project
capital project
a long-term, capital-intensive investment to build upon, add to, or improve a capital asset
Capital projects typically involve large-scale projects on the higher-end of expenditures compared to those requiring fewer resources. Some examples of capital projects include roads, railways, manufacturing plants, nuclear power plant construction, power transmission, and electrical distribution.
when is ARR used
ARR is used when a decision is required about which of two projects should be pursued in order to generate the most profit
average rate of return (ARR) formula
ARR = 100 x average annual profit/cost of investment
outlay
the amount of money spent on something
Opportunity cost
The loss of other alternatives when one alternative is chosen
infographics
A visual representation of quantitative data in a way that makes the information interesting and easy to understand
market dimensions
Market dimensions includes factors such as the size of the market, the market shares of key competitors, the rate of market growth and average prices across the market
what can financial data in a business plan be used for? (4)
- To identify trends and make calculations for comparison over time and with other businesses
- To support an application for external finance such as a loan
- To attract potential investors
- To support spending decisions
Limitations to the use of Financial Data in Decision Making (3)
- Statistical information can be interpreted in different ways (Financial data can be window dressed to present a positive impression of performance)
- Data becomes out of date quickly
- Qualitative factors are ignored
window dressing
presenting financial data in the most positive way
Social responsibility
acting in the interests of society as a whole
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