LEARNING AIM C: Understand how businesses measure success and identify areas for improvement

Topic C.1: Understand how businesses measure success

Learn the following: Cost of sales = The cost of producing a product Gross profit = The money made from selling a product (revenue), after the cost of producing the product (cost of sales) has been deducted.

Learn the formula: Gross Profit = Revenue – Cost of Sales

Impact of positive and negative gross profit? Negative gross profit means that the business is selling its products at a price where it cannot even recover its product costs, much less other expenses. In the long run, this is unsustainable because the business is losing cash on each of its sales. Positive means that the business is operating at a point where it is profitable prior to interest and taxes.

Learn the following: Net profit = the money made from selling a product after all costs (expenditure) have been deducted.

Learn the formula: Net Profit = Gross Profit – Expenditure

Impact of positive and negative net profit? Example: If a business has net annual sales of £150,000 and expenses of £100,000, its net income is £50,000. If a business has net annual sales of £150,000 and expenses of £158,000, its net loss is £8,000.

What are financial statements? Financial Statements allow businesses to measure their financial resources. Public Limited Companies must publish their accounts so that investors can see how well they are doing and judge whether or not to by their shares on the stock exchange. Two main types of financial statements you need: – Profit & Loss – Balance Sheets.

Profit & Loss The profit and loss account shows how much has been made/lost at the end of the year. It can help a bank or lender decide whether to invest in a company. Can be used for budget setting and plan their finances.

Profit & Loss Example 1. Examples of Profit & Loss and Balance Sheet

Balance Sheet A snapshot of the firm’s position at a point in time. Shows what a company owns (assets) and what it owes (liabilities) Balance Sheet shows what assets a company has (use of funds) and where the money came from to acquire those assets (source of funds)

Balance Sheet needs to include: Assets = what the business owns or is owed. Liabilities = what the business owes to others. Working capital = Assets – Liabilities (the amount used to run day to day activities).

Balance sheet Example 1. Examples of Profit & Loss and Balance Sheet

You now need to go through the following worksheets on moodle: 1.Examples of Profit & Loss and Balance Sheet 2.What is profit & loss all about 3.Sweet treats Profit & Loss 4.What are balance sheets all about 5.Big Tasty Burger Balance sheet