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 price Business 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 52 500 Weekly o/h exp -18 500 -21 000 -40 000 Net Profit 9 900 16 500 12 500 Gross Profit % 50% 33.3% 43.75% Net Profit % 17.43% 14.67% 10.42%

Effect of the reduced Selling Price Business A Selling 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 21 000 Weekly o/h exp -18 500 Net Profit 9 900 2 500

Effect of the reduced Selling Price Business B Selling 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 16 250 Weekly o/h exp -21 000 Net Profit 16 500 (4 750)

Effect of the reduced Selling Price Business C Selling 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 31 500 Weekly o/h expense -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

UNIT SALES LOSS IN PROFITS Maximising Profits If a business chooses to offer discounts to increase demand: UNIT SALES LOSS IN PROFITS

Sales – Cost of sales = Gross Profit Maximising Profits Cost of sales The net purchase cost of goods that have been sold during a period Sales – Cost of sales = Gross Profit PROFITS COST OF SALES 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 TRADERS Selling Price 150 Cost of Sales 100 96 Number of units 500 Sales Revenue 75 000 Cost of sales -50 000 -48 000 Gross Profit 25 000 27 000 Weekly o/h expense -15 000 Net Profit 10 000 12 000

Maximising Profits Reduce COST OF SALES Negotiate with another Supplier WANNABE – RICH TRADERS Selling Price 150 Cost of Sales 100 96 Number of units 500 Sales Revenue 75 000 Cost of sales -50 000 -48 000 Gross Profit 25 000 27 000 Weekly o/h expense -15 000 Net Profit 10 000 12 000 Gross Profit % 33.3% 36% Net Profit % 13.3% 16%

Statement of Comprehensive Income Question 2.2 Business A Business B Business C Selling 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 500 3 500

Effect of the reduced Cost of Sales Business A Selling Price 400 Cost Price 200 190 Number of units 142 Sales Revenue 56 800 Cost of sales -28 400 -26 980 Gross Profit 28 400 29 820 Weekly o/h exp -18 500 Net Profit 9 900 11 320

Effect of the reduced Cost of Sales Business B Selling Price 1500 Cost Price 1000 950 Number of units 75 Sales Revenue 112 500 Cost of sales -75 000 -71 250 Gross Profit 37 500 41 250 Weekly o/h exp -21 000 Net Profit 16 500 20 250

Effect of the reduced Cost of Sales Business C Selling Price 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 55 875 Weekly o/h expense -40 000 Net Profit 12 500 15 875