6.4c Analysing Financial Performance
Profit Margins
- When all expenses have been paid, the remaining money is profit.
- A profit margin is the percentage of every pound spent by customers.
- Gross profit margin: the percentage of revenue left after selling the product.
- Net profit margin: percentage of revenue left after all costs have been paid.
Calculating Gross Profit Margin
Calculating Net Profit Margin
Stakeholder's Interests
Several different stakeholders are interested in a business's financial performance. They include:
- Shareholders and potential shareholders want to see the value of the business, profits, and dividends, to ensure their investment is safe and they will get a dividend.
- Management can calculate how their decisions to spend have affected profits.
- Employees want to know their jobs are secure and the possibility of a pay rise.
- Government needs to know how much Corporation Tax is owed by the business.
- Suppliers want to know if the business is profitable so it can pay its bills. They are also interested in liquidity — how quickly the business can get cash available.
Analysing Competitors
Performance in the market can be analysed by a business comparing its data to competitors. Financial statements can be difficult to compare, so gross and net profit margins can be used.
Let’s look at two rival businesses…
Comparison of Gross Profit Margins
- Starship Enterprises’ gross profit margin was 44%
- Klingon Empire’s gross profit margin was 40%
Comparison of Net Profit Margins
- Starship Enterprises’ net profit margin was 22%
- Klingon Empire’s net profit margin was 20%
Conclusion
Klingon Empire Ltd had greater revenue, and made double the profit, of Starship Enterprises.
However, Starship Enterprises had greater profit margins than Klingon Empire Ltd. This shows that Starship Enterprises is more efficient. If it could maintain those efficiences and increase revenue to match Klingon Empire's, it would be more profitable.
6.4b Statements of Financial Position
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