6. Example Sales Costs Profit or Loss? £100,000 £75,000 £25,000 (profit) £100,000 £125,000 £25,000 (loss) Total sales > total costs Total costs > total sales Total sales = total costs = Profit = Loss = Break-even
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8. Two Key Terms to Remember Capital The amount invested into a business or project Net profit margin The percentage return made on sales; calculated as net profit divided by sales
10. Net Profit Margin – What is Net Profit? Net profit is what is left after all the costs of a business have been taken from its sales revenue Example £’000 Sales 150 Wages (50) Energy costs (25) Marketing (15) Other overheads (30) NET PROFIT 30 Net profit margin 20%
11. Net Profit Margin – the formula Note: net profit margin is expressed as a percentage Net profit margin = Net profit (before tax) Sales X 100
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13. The Importance of Comparison (1) The net profit margin of a business should be compared with other competitors in the same market, and over time Example Company A £’000 Company B £’000 Company C £’000 Sales 150 250 500 Net profit 50 25 125 Net margin 20% 10% 25%
14. The Importance of Comparison (2) Company C makes the highest net margin of these three & also the highest sales. So it makes the largest net profit too Company A makes a higher net profit than Company B even though its sales are lower – because it has a higher net profit margin Example Company A £’000 Company B £’000 Company C £’000 Sales 150 250 500 Net profit 50 25 125 Net margin 20% 10% 25%
16. What is Capital? Capital is the amount invested in a business Return on capital is the percentage return on that investment Example £’000 Net profit 200 Capital 2,500 Return on Capital 8%
17. Return on capital– the formula Note: return on capital is expressed as a percentage Return on Capital = Net profit (before tax) Capital invested X 100
20. The Basics of Increasing Profits Sales Increase quantity sold Increase selling price Reduce VC per unit Reduce fixed costs Increase output Variable Costs less Fixed Costs less Net Profit =
28. Two Different Concepts Sales Variable Costs less Fixed Costs less Net Profit = What is Profit? Cash Inflows Cash outflows less Net Cash Flow = What is Cash Flow?
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30. Some examples Transaction Example What happens to Profit? What happens to Cash Flow? Customer buys goods for £50,000 on 60 days credit Sales of £50,000 are recognised immediately Cash inflow of £50,000 when the customer actually pays Marketing campaign costing £10,000 ordered from marketing agency Cost of £10,000 included in marketing costs Cash outflow of £10,000 when the marketing agency is paid New factory machinery bought for £150,000 No effect. £150,000 added to the value of fixed assets Cash outflow of £150,000 paid to supplier of machinery Depreciation charge of £100,000 to reflect use of factory fixed assets Depreciation of £100,000 included as a cost No effect on cash flow
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