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Business calculations.pptx
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EDEXCEL GCSE BUSINESS · PAPER 2
Business calculations
Making financial decisions
Lesson 1 of 2
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EDEXCEL GCSE BUSINESS · PAPER 2
From Topic 1
Making financial decisions
Lesson 1 of 2
Answer from memory before the answers appear.
1
How do you calculate revenue?
2
How do you calculate total costs?
3
How do you calculate profit?
4
How do you calculate interest as a percentage?
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EDEXCEL GCSE BUSINESS · PAPER 2
From Topic 1 - Answers
Making financial decisions
Lesson 1 of 2
1
How do you calculate revenue?
Price × quantity sold.
2
How do you calculate total costs?
Fixed costs + total variable costs.
3
How do you calculate profit?
Total revenue - total costs.
4
How do you calculate interest as a percentage?
(Total repayment - borrowed amount) ÷ borrowed amount × 100.
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EDEXCEL GCSE BUSINESS · PAPER 2
Learning Objectives
Making financial decisions
Lesson 1 of 2
1
Calculate gross profit.
2
Calculate net profit.
3
Calculate the gross profit margin.
4
Calculate the net profit margin.
5
Interpret profit and profit margins to judge performance.
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EDEXCEL GCSE BUSINESS · PAPER 2
PART ONE
Gross and Net Profit
Two measures of profit, telling two different stories.
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EDEXCEL GCSE BUSINESS · PAPER 2
Gross Profit
Making financial decisions
Lesson 1 of 2
Gross profit = sales revenue - cost of sales.
Sales revenue
The money received from selling products.
Cost of sales
The direct cost of making or buying the products that were sold - raw materials, stock bought to sell and production wages.
What it shows
How much profit the business makes from its products, before paying for everything else.
Example
Bright Bikes sells £500,000 of bikes. The bikes and parts it sold cost £300,000. Gross profit = £500,000 - £300,000 = £200,000.
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EDEXCEL GCSE BUSINESS · PAPER 2
Net Profit
Making financial decisions
Lesson 1 of 2
Net profit = gross profit - other operating expenses and interest.
Other operating expenses
The costs of running the business that are not part of cost of sales - rent, salaries of office staff, marketing, insurance and utilities.
Interest
The cost of borrowing - interest paid on loans and overdrafts.
What it shows
The true profit left for the owners after every cost has been paid.
Example
Bright Bikes' other operating expenses are £120,000 and it pays £10,000 interest. Net profit = £200,000 - £120,000 - £10,000 = £70,000.
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EDEXCEL GCSE BUSINESS · PAPER 2
Bright Bikes Ltd: Income Statement
Making financial decisions
Lesson 1 of 2
Item
£
Sales revenue
500,000
Cost of sales
(300,000)
Gross profit
200,000
Other operating expenses
(120,000)
Interest
(10,000)
Net profit
70,000
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EDEXCEL GCSE BUSINESS · PAPER 2
Reading the Accounts
Making financial decisions
Lesson 1 of 2
Gross profit, net profit and margins tell an owner how the business is really doing.
Revenue alone tells an owner little. Gross profit shows whether the business is buying and making its products at the right cost; net profit shows whether it is controlling everything else. The margins let the owner compare one year with another.
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EDEXCEL GCSE BUSINESS · PAPER 2
PART TWO
Profit Margins
Turning profit into a percentage.
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EDEXCEL GCSE BUSINESS · PAPER 2
Gross Profit Margin
Making financial decisions
Lesson 1 of 2
Gross profit margin (%) = (gross profit ÷ sales revenue) × 100.
What it shows
How many pence of gross profit the business makes from every £1 of sales.
A higher margin
Means the business buys or makes its products cheaply compared with its selling price.
How to improve it
Raise prices, or find cheaper suppliers and cut the cost of sales.
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EDEXCEL GCSE BUSINESS · PAPER 2
Bright Bikes' Gross Profit Margin
Making financial decisions
Lesson 1 of 2
Divide, then multiply by 100.
Bright Bikes' gross profit is £200,000 and its sales revenue is £500,000. Calculate its gross profit margin.
1
Write the formula
GPM = (gross profit ÷ sales revenue) × 100
2
Put in the numbers
= (£200,000 ÷ £500,000) × 100
3
Work it out
= 0.4 × 100 = 40%
ANSWER
Gross profit margin = 40%
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EDEXCEL GCSE BUSINESS · PAPER 2
Net Profit Margin
Making financial decisions
Lesson 1 of 2
Net profit margin (%) = (net profit ÷ sales revenue) × 100.
What it shows
How many pence of net profit the business keeps from every £1 of sales, after all costs.
A higher margin
Means the business controls its costs well.
The gap between margins
A big gap between gross and net margin means operating expenses and interest are taking a large share - a sign to control overheads.
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EDEXCEL GCSE BUSINESS · PAPER 2
Bright Bikes' Net Profit Margin
Making financial decisions
Lesson 1 of 2
Same method, using net profit.
Bright Bikes' net profit is £70,000 and its sales revenue is £500,000. Calculate its net profit margin.
1
Write the formula
NPM = (net profit ÷ sales revenue) × 100
2
Put in the numbers
= (£70,000 ÷ £500,000) × 100
3
Work it out
= 0.14 × 100 = 14%
ANSWER
Net profit margin = 14%
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EDEXCEL GCSE BUSINESS · PAPER 2
Bright Bikes at a Glance
Making financial decisions
Lesson 1 of 2
£200,000
Gross profit
40%
Gross profit margin
£70,000
Net profit
14%
Net profit margin
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EDEXCEL GCSE BUSINESS · PAPER 2
Making financial decisions
Lesson 1 of 2
CASE STUDY
Supermarkets: Pennies in the Pound
The UK's big supermarkets sell billions of pounds of food and household goods every year, but their net profit margins are usually very low - often just a few pence of profit for every pound customers spend. Competition on price is fierce, so they keep prices low and make their profit through enormous sales volumes. A luxury brand, by contrast, may sell far less but keep a much larger share of every pound as profit. Comparing margins, not just profit in pounds, shows how differently businesses make their money.
Few pence
Net profit per £1 of sales at a typical UK supermarket
Volume
How supermarkets make their profit
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EDEXCEL GCSE BUSINESS · PAPER 2
Key Terms
Making financial decisions
Lesson 1 of 2
Sales revenue
The money received from selling products.
Cost of sales
The direct cost of making or buying the products sold.
Gross profit
Sales revenue minus cost of sales.
Other operating expenses
Costs of running the business not included in cost of sales, such as rent and salaries.
Net profit
Gross profit minus other operating expenses and interest.
Gross profit margin
Gross profit as a percentage of sales revenue.
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EDEXCEL GCSE BUSINESS · PAPER 2
Key Terms (cont.)
Making financial decisions
Lesson 1 of 2
Net profit margin
Net profit as a percentage of sales revenue.
Income statement
A financial statement showing a business's revenue, costs and profit over a period.
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EDEXCEL GCSE BUSINESS · PAPER 2
Making financial decisions
Lesson 1 of 2
YOUR TASK
Run the Accounts
15 minutes
A sports shop has sales revenue of £250,000, cost of sales of £150,000, other operating expenses of £60,000 and interest of £5,000. Calculate its gross profit, net profit, gross profit margin and net profit margin. Then suggest one way to improve each margin.
1
Calculate gross profit.
2
Calculate net profit.
3
Calculate both margins.
4
Suggest improvements.
WHAT A GOOD ANSWER SHOWS
Gross profit £100,000; net profit £35,000; GPM 40%; NPM 14%; a way to cut cost of sales or raise prices, and a way to cut overheads.
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EDEXCEL GCSE BUSINESS · PAPER 2
Can I...?
Making financial decisions
Lesson 1 of 2
Explain cost of sales.
Calculate gross profit.
Explain other operating expenses.
Calculate net profit.
Calculate gross profit margin.
Calculate net profit margin.
Read an income statement.
Suggest how to improve margins.
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EDEXCEL GCSE BUSINESS · PAPER 2
Summary & Exam Focus
Gross profit = sales revenue - cost of sales.
Net profit = gross profit - other operating expenses and interest.
Gross profit margin = (gross profit ÷ sales revenue) × 100.
Net profit margin = (net profit ÷ sales revenue) × 100.
EXAM FOCUS
Calculate the net profit margin for a business with net profit of £45,000 and sales revenue of £300,000. (2 marks)
Write the formula, show the division, give the answer with a % sign. Margins always divide by sales revenue - never by costs.
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