INTERPRETING FINANCIAL RESULTS

INTERPRETING FINANCIAL RESULTS

Learning Objectives• Outline the main elements and

components of a set of financial statements

• Explain the difference between gross profit, net profit and cash on hand

• Explain reasons for increases/decreases in expenses

• Identify ways to reduce shrinkage

INTERPRETING FINANCIAL RESULTS

Learning Objectives• Understand the difference between

technical and fundamental analysis• Apply profitability, liquidity and investment

ratios• Assess the efficiency and profitability of a

business using these tools

Statement of Comprehensive Income• The following comprehensive income

items have a direct or indirect effect on profitability:– Sales– Cost of sales– Gross profit– Expenses– Interest – Income tax

• The primary aim of any business is to maximise profits

Statement of Comprehensive Income

Sales – selling priceBusiness A Business B Business C

Selling Price 400 1500 8000

Number of units 142 75 15

Sales Revenue 56 800 112 500 120 000

Cost of sales -28 400 -75 000 -67 500

Gross Profit 28 400 37 500 52 500Weekly o/h exp -18 500 -21 000 -40 000

Net Profit 9 900 16 500 12 500Gross Profit % 50% 33.3% 43.75%Net Profit % 17.43% 14.67% 10.42%

Effect of the reduced Selling Price

Business ASelling Price 400 300

Number of units 142 210

Sales Revenue 56 800 63 000

Cost of sales -28 400 -42 000

Gross Profit 28 400 21 000Weekly o/h exp -18 500 -18 500

Net Profit 9 900 2 500

Effect of the reduced Selling Price

Business BSelling Price 1500 1125

Number of units 75 130

Sales Revenue 112 500 146 250

Cost of sales -75 000 -130 000

Gross Profit 37 500 16 250Weekly o/h exp -21 000 -21 000

Net Profit 16 500 (4 750)

Effect of the reduced Selling Price

Business CSelling Price 8000 6000

Number of units 15 21

Sales Revenue 120 000 126 000

Cost of sales -67 500 -94 500

Gross Profit 52 500 31 500Weekly o/h expense -40 000 -40 000

Net Profit 12 500 (8 500)

Conclusion: The clearance sale was not profitable for any of the businesses. Both Business B and C made a loss during the clearance sale week, while Business A made a lower than usual net profit.

Maximising Profits

How do you increase Sales?• Increasing demand for the product

– Ensure you have the best product– Ensure your products keep up with the trends

that prevail in the market– Try to set new trends and fashions with new

products– Advertising your products – Offer discounts to increase sales– Maintain sales returns to a minimum

Maximising Profits

If a business chooses to offer discounts to increase demand:

UNIT SALES

LOSS IN PROFITS

Maximising Profits

Cost of sales• The net purchase cost of goods that have

been sold during a periodSales – Cost of sales = Gross Profit

PROFITS

SALES COST OF SALES

Maximising Profits

Reduce COST OF SALES• Reduce Production costs • Reduce Purchase costs

– Negotiate discounts / improved payment terms– Reduce stock loss from damage or theft– Decrease transport and storage costs– Buy in bulk to get a better purchase price– Buy from different suppliers

Maximising Profits

Reduce COST OF SALES– Negotiate with another Supplier

WANNABE – RICH TRADERSSelling Price 150 150

Cost of Sales 100 96

Number of units 500 500

Sales Revenue 75 000 75 000

Cost of sales -50 000 -48 000

Gross Profit 25 000 27 000Weekly o/h expense -15 000 -15 000

Net Profit 10 000 12 000

Maximising Profits

Reduce COST OF SALES– Negotiate with another Supplier

WANNABE – RICH TRADERSSelling Price 150 150

Cost of Sales 100 96

Number of units 500 500

Sales Revenue 75 000 75 000

Cost of sales -50 000 -48 000

Gross Profit 25 000 27 000Weekly o/h expense -15 000 -15 000

Net Profit 10 000 12 000Gross Profit % 33.3% 36%Net Profit % 13.3% 16%

Statement of Comprehensive Income

Question 2.2

Business A Business B Business CSelling Price per unit, excl VAT

(456 / 1.14) 400

(1710 / 1.14) 1 500

(9120 / 1.14) 8 000

Cost Price per unit, excl VAT

(228 / 1.14) 200

(1140 / 1.14) 1 000

(5130 / 1.14) 4 500

Gross Profit per unit

200 500 3 500

Effect of the reduced Cost of Sales

Business ASelling Price 400 400

Cost Price 200 190

Number of units 142 142

Sales Revenue 56 800 56 800

Cost of sales -28 400 -26 980

Gross Profit 28 400 29 820Weekly o/h exp -18 500 -18 500

Net Profit 9 900 11 320

Effect of the reduced Cost of Sales

Business BSelling Price 1500 1500

Cost Price 1000 950

Number of units 75 75

Sales Revenue 112 500 112 500

Cost of sales -75 000 -71 250

Gross Profit 37 500 41 250Weekly o/h exp -21 000 -21 000

Net Profit 16 500 20 250

Effect of the reduced Cost of Sales

Business CSelling Price 8000 8000

Cost Price 4 500 4 275

Number of units 15 21

Sales Revenue 120 000 126 000

Cost of sales -67 500 -64 125

Gross Profit 52 500 55 875Weekly o/h expense -40 000 -40 000

Net Profit 12 500 15 875