2.4.1 Business calculations GapFill

In business there are a number of useful calculations which will help the business to make good decisions.  A good decision will ensure that the business is successful and that its products and services meet the needs of its customers.

A business can use the ARR or average rate of   take give revenuereturn calculation to help it to decide between more than one project.  There are finite resources in a business, so difficult decisions may need to be made.  A retailer may need to decide between opening a new shop or taking on more staff and will use ARR calculations to help it make that choice.  ARR calculations show the size of the return on the   interest investment business asset made.  So if a business puts capital into a project, it will want to know how much profit it will get back.  The project which has the higher rate of return or ARR percentage is possibly the project that the business will decide on.  There may be other factors, such as action of competitors, strength of the brand or how dynamic the market is.

A business will also want to know what its gross profit and net profit figures are.  Gross profit (GP) is calculated by taking the cost of making or buying the products or services (COS) from the sales   product tax income revenue (SR) figures.  Gross profit shows the managers how efficient the business is at using its resources, such as staff and raw materials, in making profit.  Gross profit is shown as a currency value, e.g. £35,000.  A business may also want to find out what the profit figure is after deducting all the costs of the business and so will calculate its net  profit earnings revenue purpose (NP) figure.  This shows the owners and investors whether the business can make more revenue than it spends on  costs price profit money .  To calculate this, the business would use the gross profit (GP) figure and then subtract all expenses and any interest payments on loans.  This is also shown as a   euro cash currency dollar value.

Gross profit margin (GPM%) and net profit margin (NPM%) calculations are also helpful for an owner and investor to help them compare one year with another, and one business with another.  It helps to measure how well the business can earn profit in relation to its sales revenue.  Both the GPM and NPM calculations are expressed as a  percentage share segment ratio , e.g. 42%.