PROFITABILITY RATIO SASHA AND TIKA

WHAT IS PROFITABILITY? it measures the profit in relation to other variables. Such as sales turnover. The value of profitability ratio varies for different size of businesses. As the same value might not be as profitable for a bigger businesses compare to smaller ones. They only apply to profit oriented businesses.

GROSS PROFIT MARGIN (GPM) GPM is the value of Gross Profit in form of % in Sales Revenue. GPM= ( Gross Profit ÷ Sales Revenue ) × 100 Improving GPM: o Raising revenue o Reducing the selling price for price elastic products o Raise the selling price for price inelastic products o Marketing strategies to raise sales revenue o Reducing direct costs o Cut direct material costs o Cut direct labour costs

NPM is the % of sales turnover that is turned into net profit. NPM = (Net Profit ÷ Sales Revenue) x 100 Difference between NPM and GPM is that this shows the expenses, therefore it will be harder to control the overheads if the ratio between these two are larger. To improve NPM, it is the same method as GPM. Reducing business expenses: o Negotiate preferential payment terms with creditors and suppliers. o Negotiate cheaper rent. o Reduce indirect cost. NET PROFIT MARGIN (NPM)