Reasons for Rise in Gross Profit Percentage,How to Increase Net Profit Percentage?

Reasons for fall in Gross Profit Percentage

1. Increase in cost of goods sold.
2. Unnecessary expenses incurred.
3. Inefficiency of workers.
4. Loss or damage of stock.
5. Lower selling price.
6. Changes in fashion, taste etc.

Reasons for Rise in Gross Profit Percentage

1. Decrease in cost of goods sold.
2. Increased efficiency.
3. Reduction in unnecessary expenses.
4. Decrease in loss due to theft or damage.
5. Increased selling price.

How to Increase Net Profit Percentage?

Net profit percentage can be increased by increasing turnover, reducing cost of goods sold and reducing expenses.

Turnover can be increased by increasing selling price, using more advertising, sales promotion or by allowing more credit.

Cost of goods sold can be reduced by purchasing goods in bulk at a lower price or by finding out better and cheaper suppliers

Expenses can be reduced by reducing costly advertising, reducing the number of employees or reducing free services offered.

Capital and Profit.

A businessman can get a clear picture of the profitability of his business only when he compares the profit with the capital invested. By this he can find out the percentage of profit on the capital invested and also can compare the profit with what he could have earned by investing the money in banks or building societies.

Rate of Stock Turnover or Stock Turnover

Rate of stock turnover is a measurement of how immediately goods are sold in a given period of time, usually one year. This ratio is generally expressed in terms of times. Rate of Turnover may vary from firm to firm. For high quality, expensive items rate of turnover will be low because such goods are sold very slowly. But for perishables like fresh fish, vegetables, fruits, newspapers etc the rate of turnover will be high because these goods are sold quickly.

Rate of Stock Turnover = Cost of Goods Sold

                                                Average Stock

Average Stock = Opening Stock + Closing Stock

                                                     2 

Importance of Rate of Stock Turnover

A firm with high rate of stock turnover will be more efficient because:

1. Less capital will be tied up.
2. Expenses are spread over a large volume of sales.
3. Stocks are quickly sold off and the cash so recovered can be used to pay off creditors.
4. Frequent purchase of stock from its suppliers makes it possible to buy in more favourable terms.
5. Loss due to damage, spoilage and changes in fashion will be very low.

How to improve the rate of stock turnover?

1. By reducing the size of the average stock needed. This can be done by eliminating the slow lines or by placing smaller orders with suppliers.

2. By cutting prices, especially for luxury goods, if demand is price elastic

3. By advertising and sales promotion.

4. By offering credit 

QUESTIONS

1. Fig. shows several sources of finance.

SOURCES OF FINANCE
Long term	Short Term
Bank Loan	Bank overdraft
Debentures	Hire Purchase
Ordinary shares	Trade Credit

Use Fig.  to help you to answer the following questions.
(a) Distinguish between long term and short term sources of finance.                                 [4]
(b) Name one other source of long term finance not shown in the diagram.                                   [1]
(c) Explain three differences between a bank loan and a bank overdraft.                            [6]
(d) Giving reasons for each of your choices, recommend a source of finance given in Fig. that a limited company might use to:
(i)         purchase a new factory                                                                                                      [3]
(ii)        pay for computer software                                                                                                  [3]
(iii)       make repairs to its office building.                                                                                                [3]

2. Fig. shows a limited company with the following sources of finance available to it.

(a) From Fig. identify:

     (i)  two short-term sources of finance                                                                                       [2]
    (ii)  one long-term source of finance.                                                                                       [1]
(b) Explain the differences between a debenture and an ordinary share.                            [4]

(c) Giving reasons for each of your answers, recommend a source of finance given in Fig. that a limited company might use:
      (i) to build an extension to its offices                                                                                      [3]

    (ii) to pay for a new computer system

         (iii) to obtain stock from a supplier.                                                                                       [3]

(d) Explain two reasons why this company might prefer to use retained profits rather than any of the sources of finance listed in Fig.                                                                                   [4]

3. (a) What are the main characteristics of a bank loan?                                                         [6]

(b) In what circumstances would a building company make use of a bank loan rather than a bank overdraft?                                                                                                             [4]
(c) The building company wishes to obtain a loan of $600000.

(i) Imagine that you are a bank manager. What information would you require from the building company before you decide whether or not to offer a bank loan?                 [5]

    (ii) Interest rates are 6% per year. Calculate how much interest the building company will pay each year if it obtains the $600 000 loan. Show your working.                       [2]

   (d)    Explain why the building company might use its retained profits to finance a project.                                                                                                                                                      [3]

4. A small company manufacturing garden machinery has the following three financial problems:

·    an immediate shortage of cash to pay some unexpected bills

·    the need to replace all the out-of-date office computers

·    expansion plans for the business over the next five years.

Methods of finance available to the company are:

Using the list of methods of finance given above, answer the following questions.

(a)  Giving an example of each from the list above, distinguish between long-term and short-term methods of finance.                                                                                                       [4]

(b)  From the list above, recommend the best method of finance to solve each of the company’s three financial problems. In each case give three reasons for your choice.                                                                                                                                               [12]

(c) It would be possible to use debentures to finance the company’s expansion plans. State and explain two reasons why the company rejected this source of finance for this project.                                                                                                                            [4]