Accounting Ratios Essay

312 WordsJan 5, 20152 Pages
Accounting Ratios Accounting ratios are used by lots of people to decide how well a business is performing, whether this is by directors of the company making sure everything is going as planned, or by lenders to see whether the business has the ability to repay debts. To be of the most use to a business, ratios need to be looked at over a period of time, whether comparing the current ratio to: • The previous year • Budgeted / forecast figures • Other companies • Industry averages Some of the main ratios are: • Gross Profit % • Net Profit % • Stock turnover Gross profit % (GP%) Gross profit % is calculated as: (Gross profit / sales) x 100% The gross profit percent measures what margin has been earned on sales, before taking account of overhead costs. For example, if a business has sales of £10m and a gross profit of £4m, the GP% is: £4m / £10m x100% = 40% Schools would use gross profit because they would need to break even cause the money they would get from the students fees they would use that as sales and the equipment bought like chairs and desks would be an expense to get gross profit. Net Profit % Net profit % is calculated as: (Net profit / sales) x 100% This measure the margin earned on sales, after taking account of all costs of the business. If gross profit % has not changed, a change in net profit % will be caused by changes in overhead costs such as light and heat, motor expenses etc. These other costs should then be reviewed to see whether increases are reasonable, or whether costs can be cut without damaging the business. Schools would use this to see if they have made money in a loss or a gain cause if the net profit is low then they would have spent more on overhead expense than what they earned by the students

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