B1 Financial Growth Measures
Sales Turnover
Sales turnover is the total amount of money coming into the business from selling goods and services. Sales turnover can be used as a financial growth measure by comparing revenue across different years or quarters to see if it increases or decreases. It is calculated by the formula:
Sales turnover = quantity sold x selling price.
Profit
Profit refers to the money remaining in a business after costs have been deducted from sales turnover. It is an important metric in measuring the financial performance of a business and can provide data on how effectively the business is managing their sales, costs and investments. Profit can be categorised into gross profit and net profit.
Sales turnover is often confused with profit. However, profit is the amount of sales turnover left after business costs have been paid. It is calculated by the formula: profit = sales turnover - costs.
Gross Profit and Net Profit
Gross profit refers to the money remaining in the business from sales turnover after cost of sales have been deducted. It is calculated using the formula:
gross profit = sales turnover - cost of sales. Gross profit provides a useful metric to analyse sales or management of cost of sales.
Cost of sales refers to the direct costs of producing goods and services. This usually means the raw materials involved in production.
Net profit refers to the money remaining in the business after both cost of sales and expenses have been deducted from sales turnover. It is calculated using the formula:
net profit = total sales turnover - total costs or net profit
or
net profit = gross profit - expenses.
Net profit provides a useful metric to analyse how well a business is managing their expenses
Profit Margins
Profit margins are metrics used to compare the profits made by a business to sales turnover. They use percentages to indicate the proportion of sales turnover that ends up as profit. The use of percentages allows for an easy comparison over time periods to assess financial performance and make judgements about growth potential.
The gross profit margin calculates the proportion of sales turnover that ends up as gross profit. Its is calculated using the formula:
gross profit margin = (gross profit / turnover) x 100
The net profit margin calculates the proportion of sales turnover that ends up as net profit. It is calculated using the formula:
net profit margin = (net profit / turnover) x 100
Capital Employed
Capital employed refers to the total amount of money that has been invested into the business to generate profits. It includes money from shareholders (share capital), retained profit and long term loans. Capital employed is an important factor in the growth of business as these funds can be invested in property and equipment that allows a business to expand its operations, increase the rate of production and enter new markets.
Return on Capital Employed (ROCE)
The ROCE is a ratio used to measure how well a business makes profits from its investments. It is calculated using the formula:
ROCE = (net profit before interest and tax / sales turnover) x 100