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Unit 2

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For Lucy to gain a better understanding of how well her business is doing, she could uses accounting ratios. By following these ratios, she can therefore measure the financial performance of her business.
Gross Profit Percentage
The first ration is Gross Profit Percentage (GPP) this ration show how much of the company’s revenue is retained as gross profit. This is shown as a percentage. If the overall percentage is a high figure, it shows Lucy is in control of purchases she is making.
GPP= (Sales-Cost of Sales) / Turnover
Looking at Lucy’s Profit And Loss Sheet, we can see that
Sales = 150000
Cost of sales = 50000
Revenue = 100000

This means the ratio for Lucy’s Gross Profit Percentage would be
£150000 - £50000 / £150000 x 100 = %25

This figure is low and this is because she is using some of her profit money to buy more stock than she needs to.

Net Profit Percentage

Net Profit Percentage shows the percentage of turnover after all expenses have been taken out. If the business was to have a high GPP but a low NPP, it suggests the operating costs of the business are too high as they are taking too much profit out of the business. If NPP is substantially lower than GPP, it would mean the business needs to take action to decrease their daily running costs.

NPP= (Gross Profit-Expenses) / Turnover
Looking at Lucy’s profit and loss, sheet we can see that
Gross Profit = 100000
Expenses = 53800
Turnover = 46200

This means the ratio for Lucy’s Net Profit Percentage would be
£100000 - £53800/ £46200 x 100 = %1

By looking at this we see that Lucy’s net profit is lower than her gross profit. This means that her operating costs are too high and she needs to reduce her operating costs. To reduce her operating costs and increase her NPP she may consider buying a certain amount she knows she will sell instead of buying too much stock and not

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