Understanding business performance
There are a number of ways to measure the performance of a business, including:
- changes in costs
- changes in revenueThe income earned by a business over a period of time from selling its goods or services.
- gross profitThe difference between sales revenue and the cost of making the product sold.
- net profitThis profit is calculated by deducting all expenses away from gross profit.
- gross profit marginThe percentage of sales revenue that is left once the cost of sales has been paid.
- net profit marginThe proportion of sales revenue that is left once all costs have been paid.
Most of the information required to analyse the performance of a business is contained within its accountsThe financial records of a business.. Particular care is required if this information is used to compare the performance of one business against another business. This is because different businesses might have different accounting periods, and they may also have different accounting policiesA system of principles used to guide decisions.. It is important that comparable data is used.
Even when analysing multiple sources of information from the same business, it is possible to interpret the performance of the business in different ways, depending on how the information is used.
Question
The bosses at a large supermarket chain are pleased with the performance of the business this year, pointing out that sales have increased by 20%. They claim that this is because of their decision to open ten new stores over the past year. Complete the table below and explain whether you think the bosses of this supermarket chain are right to be pleased with the performance of the business.
| Information from a large supermarket chain | Last year | This year |
| Sales revenue | £1,000,000 | £1,200,000 |
| Gross profit | £380,000 | £600,000 |
| Net profit | £150,000 | £150,000 |
| Gross profit margin | ||
| Net profit margin |
| Information from a large supermarket chain | Sales revenue |
|---|---|
| Last year | £1,000,000 |
| This year | £1,200,000 |
| Information from a large supermarket chain | Gross profit |
|---|---|
| Last year | £380,000 |
| This year | £600,000 |
| Information from a large supermarket chain | Net profit |
|---|---|
| Last year | £150,000 |
| This year | £150,000 |
| Information from a large supermarket chain | Gross profit margin |
|---|---|
| Last year | |
| This year |
| Information from a large supermarket chain | Net profit margin |
|---|---|
| Last year | |
| This year |
| Information from a large supermarket chain | Last year | This year |
| Sales revenue | £1,000,000 | £1,200,000 |
| Gross profit | £380,000 | £600,000 |
| Net profit | £150,000 | £150,000 |
| Gross profit margin | 38% | 50% |
| Net profit margin | 15% | 12.5% |
| Information from a large supermarket chain | Sales revenue |
|---|---|
| Last year | £1,000,000 |
| This year | £1,200,000 |
| Information from a large supermarket chain | Gross profit |
|---|---|
| Last year | £380,000 |
| This year | £600,000 |
| Information from a large supermarket chain | Net profit |
|---|---|
| Last year | £150,000 |
| This year | £150,000 |
| Information from a large supermarket chain | Gross profit margin |
|---|---|
| Last year | 38% |
| This year | 50% |
| Information from a large supermarket chain | Net profit margin |
|---|---|
| Last year | 15% |
| This year | 12.5% |
The information shows that although the supermarket chain’s sales revenue did increase by 20%, its net profit remained the same. This means that the net profit margin fell from 15% to 12.5%. The fact that the gross profit margin increased from 38% to 50% would indicate that the fall in the net profit margin was caused by an increase in overheads related to the costs associated with opening the new stores. The performance of the business overall is worse this year than last year as the net profit margin is lower.
