2.4.1_Gross_profit_net_profit_GPM___NPM_Student_Copy (1).pptx

2.4.1 Gross profit net profit gpm npm

1. PowerPoint Guide The news icon is hyperlinked to a related article or website. Simply click to access The film icon is hyperlinked to a related clip. Simply click to access The discuss icon indicates suggested points to discuss The calculation icon indicates a calculation task

2. 2.4 Making financial decisions 2.4.1 Business calculations – Gross profit, net profit, GPM (%) & NPM (%)

3. Key elements to this topic Concept and calculation of gross profit and net profit Concept and interpretation of gross profit and net profit margin

4. Profit can be measured and calculated as Gross Profit Net Profit

5. COPY What is Gross Profit COPY Gross profit is the amount of money the business makes after the direct costs of making/selling its products or providing its services, otherwise known as its costs of sales, are deducted from its sales revenue.

6. COPY What is Net Profit COPY Net profit is the profit the business generates after all other operating expenses and interest, not included in the calculation of gross profit, have been paid.

7. Formulae Gross profit = sales revenue – cost of sales Net profit = gross profit – other operating expenses and interest

8. Let’s take a closer look at these calculations…   Sales Cost of sales Gross profit Other operating expenses & interest Net profit (or loss) Business A £100,000 £40,000 £35,000 Business B £100,000 £70,000 £40,000   Total sales greater than total costs Total costs greater than total sales Total sales = total costs = Net profit = Loss = Break even £60,000 £25,000 (profit) £10,000 (loss) £30,000

9. Calculating gross profit Copy the table and fill in the gaps Business A Business B Business C Business D Sales revenue £50,000 £60,000 Cost of sales £60,000 £42,000 £23,400 Gross profit £12,500 £15,000 £12,600

10. Practising calculating net profit Add the extra rows to your table and fill in the gaps Business A Business B Business C Business D Sales revenue £50,000 £75,000 £60,000 £36,000 Cost of sales £37,500 £60,000 £42,000 £23,400 Gross profit £12,500 £15,000 £18,000 £12,600 Other operating expenses & interest £5,000 £14,000 Net profit £3,750 (£2,000)

11. Recap… check your understanding Complete each statement below, by filling in the missing words. ……………………… …..…………………. is the profit made by a business before any operating expenses or interest are deducted. The formula for calculating ………………………………. …………………………. is ………………… ................................................. – cost of sales. Net profit can be calculated by deducting ………………………. …………………………… …………………………… and ………………………………… from ……………………………….. profit. …………………… ……………………. is an important figure, as it shows how much the business has available to reinvest or distribute to owners. Two examples of other operating expenses a business may incur are …………………………………. and ………………………………………

12. Revenue (sales) £250,000 Cost of Sales £100,000 Other operating e xpenses £25,000 Interest £35,000 The following financial information relates to Cycles2u for last year. Calculate Cycles2u’s: Gross profit Net profit Remember to show your workings. Question:check your understanding YOU DO

13. Ratio analysis Reviewing the gross and net profit figures will tell business owners/managers how much profit a business has made in a specific time period. But, how can a business tell if that level of profit shows good business performance or not? One way to judge how “profitable” a business is to calculate profitability ratios. For GCSE Business, there are two key profitability ratios that can be calculated .

14. Ratio 1 – Gross Profit Margin (%) Gross profit margin = Gross Profit x 100 Sales Revenue This is the percentage of sales revenue that is gross profit copy

15. Gross profit margin (%) Looking at Business A’s figures from the gross and net profit calculations earlier: £ Sales revenue 50,000 Cost of sales 37,500 Gross profit 12,500 In this case the Gross Profit Margin (%) = 12,500 x 100 = 25% 50,000 This means that for every £1 of revenue, 25p is gross profit. What must the other 75p be? Gross profit margin = Gross Profit x 100 Sales Revenue

16. Calculating the GPM Business A B C Sales r evenue £200,000 £500,000 £1,000,000 Cost of Sales £100,000 £300,000 £750,000 Gross profit £100,000 £200,000 £250,000 Looking at the data below, which business do you think is performing the best? Calculate the GPM (%) for the three businesses, using the data provided in the table. Which business do you believe is performing the best now?

17. Calculating the GPM (%) Business A B C Sales r evenue £200,000 £500,000 £1,000,000 Cost of Sales £100,000 £300,000 £750,000 Gross profit £100,000 £200,000 £250,000 Gross profit margin (%) 50% 40% 25% Business C makes the highest gross profit of £250,000. However, this is because it has much higher revenues compared to Business A or B. In terms of the gross profit margin (%) , Business A has the highest gross profit margin of 50%, followed by Business B (40%) The gross profit margin (%) shows that Business A makes a gross profit of £0.50 for each £1 of revenue. This is twice the level of Business C, which only makes a gross profit of £0.25 for each £1 of revenue. If these 3 businesses operated in the same market, it can be assumed that Business A is operating the most efficiently and performing the best

18. Ways to improve the gross profit margin (%) Increase sales revenue Lower cost of sales

19. Increase the business’s sales revenue Lowering the selling price may increase demand so much that the business’s experiences an increase in revenue despite the fall in price Increasing the price may generate more revenue , if customers are prepared to pay higher prices for the product Increase awareness of the product ; this may increase sales revenue and impact favourably on the GPM (%), but such action will increase operating expenses and therefore the effect on the business’s net profit needs to be carefully monitored

20. Lower the cost of sales Business’s can try and cut down on the price paid to suppliers through renegotiating with existing suppliers Business’s could change suppliers, if another supplier can offer cheaper prices Business’s could review their existing products and see if they could be made more cheaply to cut costs

21. Ratio 2 – Net Profit Margin (%) Net profit margin = Net profit x 100 Sales revenue copy

22. Example: Looking again at Business A’s figures from the previous activity £ Sales revenue 50,000 Gross profit 12,500 Net profit 7,500 In this case the NPM (%): 7,500 x 100 = 15% 50,000 This means that for every £1 of revenue, 15p is net profit. What must the other 85p be? Net profit margin = Net profit x 100 Sales revenue

23. Calculating the NPM Example Company A £’000 Company B £’000 Company C £’000 Sales r evenue 150 250 500 Net profit 50 25 125 Looking at the data below, comment on the performance of each business. Now, calculate the NPM (%) for the three businesses .

24. Calculating the NPM (%) Example Company A £’000 Company B £’000 Company C £’000 Revenue 150 250 500 Net profit 50 25 125 Net profit margin (%) 20% 10% 25% Company C makes the highest net profit margin (%) of the three businesses and also has the highest sales. Therefore, this business makes the largest net profit. Company A makes a higher net profit than Company B even though its sales are lower; it has a higher net profit margin (%) and is clearly controlling its other operating expenses and cost of sales well

25. Improving the net profit margin (%) Again the business could try to increase its sale revenue. Let’s recap: Lower the selling price Increase the selling price Increase awareness of the product through promotion, but the expense of this needs to be carefully monitored in terms of the impact on revenue and net profit Lower expenses. For example: Delayer the organisational structure Review salary structure or bonuses Freeze recruitment Move to a cheaper location KEY POINT: The specific business situation must be looked at carefully before deciding the best way to improve either the GPM (%) or the NPM (%).

26. If you were a financial manager, which ratio, do you believe, would give a more accurate indication of how well a business was performing ? Which ratio is best? GPM(%) NPM(%) or

27. GPM(%) NPM(%) Which ratio is best? The net profit margin (%) is a better indication of a business’s financial performance, as the ratio takes into account all the other operating expenses/interest of the business. In contrast, the GPM (%), only takes into account the cost of sales.

28. Assessing financial performance Ratios provide information that can help business managers make decisions; before making a decision, managers will take into account all the circumstances facing the business and the needs of different stakeholders. The best way to assess financial performance is by comparing either actual profit figures or ratios with: Targets Previous years figures Competitors performance Stakeholder objectives

29. 9 7 4 2 1 5 6 You will be shown 4 questions You need to answer each one before the countdown music stops Get Ready.....

30. 9 7 4 2 1 5 6 Gross profit/Sales revenue x 100 State the formula for the gross profit margin (%)

31. 9 7 4 2 1 5 6 Sales revenue: £30,000 x 1.5 = £45,000 Gross profit = £45,000 - £30,000 = £15,000 Gross profit margin = £15,000/£45,000 x 100 = 33.33% A business has a cost of sales figure of £30,000. Its sales revenue is 50% higher than this figure. Calculate the business’s gross profit margin (%).

32. 9 7 4 2 1 5 6 Net profit = gross profit – operating expenses and interest NPM (%) = net profit/sales revenue x 100 State the formula to calculate net profit. If time, also state the formula for the net profit margin (%)

33. 9 7 4 2 1 5 6 Net profit = £100,000 - £25,000 - £30,000 = £45,000 Net profit margin (%) = £45,000/£100,000 x 100 = 45% A business’s sales revenue amounts to £100,000. Its cost of sales equalled £25,000 and other operating expenses and interest totalled £30,000. Calculate the business’s net profit margin (%).