Please enable JavaScript.
Coggle requires JavaScript to display documents.
2.4 Making Financial Decisions - Coggle Diagram
2.4 Making Financial Decisions
2.4.1 Business Calculations
Gross Profit = Sales revenue - cost of sales
Net profit = Gross Profit - (Operating expenses + Interest)
Profit Margin
Gross profit margin = Gross profit/sales revenue x 100
Net profit margin = profit for the year / sales revenue x 100
Average rate of return = average annual profit (total profit / number of years) / initial outlay
Advantages
Considers all net cash flows over the investment’s lifetime, giving a fuller picture than methods that only look at part of the project’s life.
Easy to calculate and understand, making it simple to compare the percentage returns of different investment projects.
Disadvantages
Ignores the timing of cash flows because it uses average profits, so receiving money sooner or later makes no difference in the calculation.
Ignores opportunity cost, meaning it does not compare the investment with the return that could have been earned from the next best alternative.
2.4.2 Quantitative data
Quantitative Data
Quantitative data is numerical information used to support business decision-making.
It must be accurate and interpreted correctly to be useful.
It can come from primary or secondary sources.
Primary data – collected first-hand for a specific purpose.
Secondary data – collected by someone else and reused.
Common sources of quantitative data:
Graphs and charts
Financial data (e.g. revenue, profit)
Marketing data (e.g. sales, market share)
Tables and infographics
Ways of presenting qualitative data
Bar Chart
Makes it easy to spot the highest and lowest values.
Compares values between different categories or time periods.
Pie Chart
Shows how a total is divided into different parts.
Makes it easy to see the largest and smallest proportions.
Scatter Graph
Shows the relationship (correlation) between two variables.
Positive correlation: both variables increase together.
Negative correlation: one variable increases as the other decreases.
Correlation can be strong (clear line of best fit) or weak (no obvious pattern).
Financial Data
Businesses use financial data such as:
Sales revenue
Profit
Costs
Tax
Interest & exchange rates
Asset values
Bank balances
Marketing Data
Collected through market research, including:
Surveys
Focus groups
Observation
Customer feedback
Footfall
Government/trade publications
Media
Used to:
Forecast sales.
Plan new products and promotions.
Market Data
Information about the market, including:
Demographics – age, gender, income.
Market dimensions – market size, market share, growth, average prices.
Investment data – commodity prices, exchange rates, stock markets.
Used to:
Identify opportunities and threats.
Support investment and business decisions.
Explanation
Limitation
Data can be interpreted in different ways or presented to make performance look better (e.g. window dressing).
Different interpretations
Financial data is out of date as soon as it is produced, so past results may not reflect future performance.
Data becomes outdated
Numerical data cannot measure things like customer satisfaction, ethics, employee morale, or business reputation.
Ignores qualitative factors