Analyze Your Financial Performance

Objectives Analyze your business’s financial statements. Calculate the level of sales you need to achieve to make a profit.

Analyze Financial Statements Analyze Your Sales Sales records should show trends and patterns. These records can be used to forecast future sales and make good decisions.

Analyze Sales by Product Analyzing sales by product can help you make decisions about kinds of inventory to stock. Can help increase sales and profits

Example Emily owns a garden and patio store. Her store has four departments: outdoor furniture, outdoor grills, plants, and garden tools. Calculate the total sales and percent of total for each department:

Answer

Checkpoint>> Based on your answers in the above table, which department should Emily consider downsizing? Why?

Analyze Net Profit on Sales The income statement shows whether or not the business is earning a profit. The rate of profit a business earns is often shown as the ratio of its net profit to its sales. The ratio is calculated as follows: Net income after taxes / Net sales = Net profit on sales

Calculate Net Sales Gross sales- dollar amount of all sales, including returns Net sales- dollar amount of sales after returns have been subtracted

Example Jack sold $235,000 worth of merchandise and had $3,200 worth of merchandise returned. Therefore, his net sales amount is ____________.

Answer Gross sales – Returns = Net sales $235,000 - $3,200 = $231,800

Calculate Net Income After Taxes Three calculations must be performed to determine net income after taxes. Gross profit Net income from operations Net income before taxes

Gross Profit Gross profit- profit before operating expenses are deducted Last year, Jack spent $150,000 for merchandise that he sold. This represents the cost of goods sold. Net sales – Cost of goods sold = Gross profit $231,800 - $150,000 = $81,800

Operating Expenses Jack’s operating expenses include rent, salaries, and similar business expenses. Last year his operating expenses were $39,900. Gross profit – Operating expenses = Net income from operations $81,800 - $39,900 = $41,900

Net Income Before Taxes To calculate net income before taxes, Jack must subtract one more expense: interest on loans Last year, Jack paid $2,400 in interest. Net income from operations – Interest expense = Net income before taxes $41,900 - $2,400 = $39,500

Income After Tax To compute his after tax income, Jack subtracts the amount he paid in income tax last year, $12,245, from his net income before taxes. Net income before taxes – Income tax paid = Net income after taxes $39,500 - $12,245 = $27,255

Why Net Profit on Sales is Important Using the net profit on sales ratio, Jack determines that his profits represented 11.8% of his net sales. Net income after taxes / Net sales = Net profit on sales $27,255 / $231,800 = .118 or 11.8%

Set and Meet Profit Goals To run a business effectively, profit goals need to be set. These goals will reflect the amount of profit you hope to earn.

Checkpoint>> Name and describe three calculations that must be completed to determine net income after taxes.

Perform Breakeven Analysis Breakeven point- volume of sales that must be made to cover all the expenses of the business Once you reach the breakeven point, sales will equal all expenses Below the breakeven point, expenses will exceed revenues Above the breakeven point, revenues will exceed expenses

Measure Costs, Sales, and Profits In order to calculate breakeven point, total fixed costs, selling price per unit, and variable costs must be calculated.

Fixed costs- remain the same regardless of how many units sold Variable costs- go up and down depending on level of sales

Example: Charlene owns a small manufacturing business that produces refrigerator magnets. The total variable cost of producing magnets depends on her level of sales at any given time. She must figure out her current variable costs in order to determine the breakeven point. She totals her goods, salaries, and advertising costs at $28,500. She then divides this number by 30,000, the number of magnets she makes each year. Her variable cost per unit is _____________.

Answer Total variable costs / Number of units = Variable cost per unit $28,500 / 30,000 = .95

Calculate Your Breakeven Point The breakeven point shows the volume of sales needed to earn a profit. If sales are below the breakeven point, prices or quantity sold need raised or costs need reduced. The formula for calculating breakeven point is as follows: Total fixed costs / (Selling price per unit – Variable cost per unit) = Breakeven point

Example Charlene’s fixed costs are 40,000 a year. Her selling price is $3.50 per unit. Her variable costs are $.95 per unit. Using these numbers in the formula, what is her breakeven point?

Answer $40,000 / ($3.5-$.95) = 15,686 units

Checkpoint>> What does the breakeven point indicate?

Assignment Thinking Critically #1-4