WEBVTT 00:00:00.500 --> 00:00:03.955 Welcome to GCSE Edexcel Business revision. 00:00:04.105 --> 00:00:07.597 Unit B U S 9: Making financial decisions. 00:00:10.267 --> 00:00:14.305 Cost of sales is the direct cost of the goods or services sold. 00:00:14.455 --> 00:00:18.057 Gross profit equals sales revenue minus cost of sales. 00:00:18.207 --> 00:00:20.447 Compare figures for the same period. 00:00:23.100 --> 00:00:29.760 Net profit , using the GCSE model, is gross profit less other operating expenses and interest. 00:00:29.910 --> 00:00:34.614 Use the categories stated in the question and avoid subtracting a cost twice. 00:00:37.267 --> 00:00:43.399 Revenue is not profit, gross profit is not net profit, and neither is the same as cash available. 00:00:43.549 --> 00:00:47.659 A profitable sale on credit may not yet have generated a cash receipt. 00:00:50.333 --> 00:00:56.561 Worked example: a shop has revenue 80,000 pounds and cost of sales 48,000 pounds. 00:00:56.711 --> 00:01:03.461 Gross profit equals 80,000 pounds minus 48,000 pounds equals 32,000 pounds . 00:01:03.611 --> 00:01:10.447 Other operating expenses and interest total 20,000, pounds so net profit equals 12,000 pounds . 00:01:13.100 --> 00:01:18.251 Gross profit can rise through higher sales, suitable prices or lower cost of sales. 00:01:18.401 --> 00:01:23.671 The effect of a price rise depends on how customers respond and what happens to volume. 00:01:26.333 --> 00:01:32.892 Net profit can change even when gross profit is unchanged, for example if rent or interest increases. 00:01:33.042 --> 00:01:36.549 Identify which stage of the calculation a change affects. 00:01:39.200 --> 00:01:45.385 Profit is an absolute money value; profitability compares profit with another measure, such as revenue. 00:01:45.535 --> 00:01:49.748 A larger profit alone does not show that the business is more efficient. 00:01:52.400 --> 00:01:55.343 Use calculations to support an explanation. 00:01:55.493 --> 00:02:01.689 Identify the cause and likely consequence rather than just repeating that profit increased or decreased. 00:02:04.367 --> 00:02:13.016 Gross profit margin as a percentage equals the quantity gross profit divided by the quantity sales revenue multiplied by 100. 00:02:13.166 --> 00:02:16.749 It shows the proportion of revenue left after cost of sales. 00:02:19.400 --> 00:02:27.793 Net profit margin as a percentage equals the quantity net profit divided by the quantity sales revenue multiplied by 100. 00:02:27.943 --> 00:02:34.054 It shows the proportion remaining after the expenses included in the GCSE net-profit calculation. 00:02:36.733 --> 00:02:47.621 Worked example: for the shop above, gross margin equals the quantity 32,000 divided by the quantity 80,000 multiplied by 100 equals 40 percent . 00:02:47.771 --> 00:02:56.345 Net margin equals the quantity 12,000 divided by the quantity 80,000 multiplied by 100 equals 15 percent . 00:02:56.495 --> 00:03:01.912 Each 1 pound of revenue leaves 40 pence gross profit and 15 pence net profit. 00:03:02.062 --> 00:03:04.331 Revenue, costs and profit 00:03:09.000 --> 00:03:13.959 Margins allow comparisons between businesses or years with different sales values. 00:03:14.109 --> 00:03:20.902 Check accounting categories and business activities before assuming a higher margin means a better overall business. 00:03:23.567 --> 00:03:28.307 A falling gross margin might reflect discounting or rising material costs. 00:03:28.457 --> 00:03:34.727 A falling net margin with stable gross margin may point to higher operating expenses or interest. 00:03:37.400 --> 00:03:40.387 Increasing margin is not the only objective. 00:03:40.537 --> 00:03:47.532 A lower margin on a larger volume can generate more total profit; compare the figures and capacity constraints. 00:03:50.200 --> 00:03:57.259 Worked example: 15 percent net margin on 80,000 pounds revenue gives 12,000 pounds profit. 00:03:57.409 --> 00:04:03.615 A 12 percent margin on 120,000 pounds gives 14,400 pounds . 00:04:03.765 --> 00:04:06.569 Margin falls but total profit rises. 00:04:09.233 --> 00:04:12.369 Distinguish percentage points from percentage change. 00:04:12.519 --> 00:04:21.893 A margin rising from 10 percent to 15 percent increases by five percentage points; relative to its original level, it rises by 50 percent. 00:04:24.567 --> 00:04:27.881 Avoid rounding intermediate values unnecessarily. 00:04:28.031 --> 00:04:33.427 State the final percentage to the accuracy required and explain what it means in the case. 00:04:36.100 --> 00:04:42.455 Average rate of return (A R R) compares an investment's average annual profit with its initial cost. 00:04:42.605 --> 00:04:51.255 A R R as a percentage equals the quantity average annual profit divided by the quantity cost of investment multiplied by 100. 00:04:53.933 --> 00:05:00.289 Average annual profit equals total profit over the stated project life divided by number of years. 00:05:00.439 --> 00:05:05.686 A R R is an average yearly percentage, not the total return over the whole project. 00:05:08.367 --> 00:05:19.031 If figures are stated as extra revenue or cash inflows rather than profit, deduct the relevant costs and initial investment as appropriate to establish total project profit. 00:05:19.181 --> 00:05:23.249 Do not deduct an investment twice if total profit is already given. 00:05:25.900 --> 00:05:34.111 Worked example: a machine costs 20,000 pounds and is forecast to generate total profit of 12,000 pounds over four years. 00:05:34.261 --> 00:05:45.482 Average annual profit equals 3,000 pounds; A R R equals the quantity 3,000 divided by the quantity 20,000 multiplied by 100 equals 15 percent . 00:05:48.133 --> 00:05:57.999 Worked example: an investment costs 10,000 pounds and generates 16,000 pounds of net returns before recovering that initial cost over three years. 00:05:58.149 --> 00:06:06.020 Total profit equals 6,000 pounds; average annual profit equals 2,000 pounds; A R R equals 20 percent . 00:06:08.700 --> 00:06:17.658 A higher forecast A R R may make an investment more attractive, but it does not show when the returns arrive or whether the business can afford the initial cost. 00:06:20.333 --> 00:06:22.626 Forecast profit is uncertain. 00:06:22.776 --> 00:06:32.669 Consider demand, costs, reliability, risk and non-financial effects such as quality, staff skills or environmental impact alongside A R R. 00:06:35.333 --> 00:06:38.542 Compare options using the same calculation basis. 00:06:38.692 --> 00:06:45.879 A recommendation should explain why the expected return is suitable for the business and which forecast assumption most affects it. 00:06:48.533 --> 00:06:56.866 Quantitative data are numerical evidence, including revenue, profit, margins, sales volumes, market share and research results. 00:06:57.016 --> 00:07:01.413 Qualitative evidence explains experiences, opinions or causes. 00:07:04.067 --> 00:07:07.339 Graphs and charts can reveal trends and comparisons. 00:07:07.489 --> 00:07:15.091 Read the title, period, axes, units and scale; a shortened vertical axis can exaggerate the visual size of a change. 00:07:17.767 --> 00:07:22.102 Financial data help assess revenue, costs, profitability and cash. 00:07:22.252 --> 00:07:31.541 Marketing data can indicate which campaigns or products attract customers; market data place performance in the context of competitors and total demand. 00:07:34.200 --> 00:07:42.541 Percentage change equals the difference between new value and original value, divided by original value multiplied by 100. 00:07:42.691 --> 00:07:44.813 A negative result is a fall. 00:07:44.963 --> 00:07:47.907 Use the original value as the denominator. 00:07:50.567 --> 00:07:55.558 Worked example: sales rise from 50,000 pounds to 60,000 pounds. 00:07:55.708 --> 00:08:04.582 Percentage change equals the quantity 10,000 divided by the quantity 50,000 multiplied by 100 equals 20 percent . 00:08:04.732 --> 00:08:10.033 If the whole market rose by 30 percent, the business's market share may still have fallen. 00:08:12.700 --> 00:08:16.265 An average summarises data but can hide variation. 00:08:16.415 --> 00:08:22.527 A high mean monthly sales figure may conceal several months with cash shortages; seasonal patterns matter. 00:08:25.200 --> 00:08:28.101 Past figures do not guarantee future performance. 00:08:28.251 --> 00:08:36.601 Unexpected competitors, economic changes or inaccurate records can make a decision based only on historic numbers unreliable. 00:08:39.267 --> 00:08:41.537 Forecasts depend on assumptions. 00:08:41.687 --> 00:08:51.110 Check sample size, period, reliability and whether data cover the decision being made; large amounts of irrelevant data do not remove uncertainty. 00:08:53.767 --> 00:08:59.943 Financial information may omit reputation, employee morale, product quality and sustainability. 00:09:00.093 --> 00:09:03.990 These can affect future performance and should be considered with the numbers. 00:09:06.667 --> 00:09:13.790 Fictional judgement: a retailer's profit rises after reducing staff, but complaints and delivery delays increase. 00:09:13.940 --> 00:09:21.405 The immediate saving may be outweighed by lost future sales; investigate repeat purchases before concluding the cut succeeded. 00:09:24.067 --> 00:09:32.529 Use evidence to build an argument: identify a pattern, explain a possible business cause, show the consequence, then make a supported judgement. 00:09:32.679 --> 00:09:35.472 A correlation alone does not prove the cause. 00:09:38.133 --> 00:09:40.831 That completes Making financial decisions. 00:09:40.981 --> 00:09:44.327 Revisit the notes and test yourself on the revision website.