Small business advice and spreadsheet needed

[JohnnyOldBoy]

No. 2 daughter is doing a Business Studies A Level and asked me about profitability. I soon realised it's more complicated than I thought.

She has been asked to explain the following and like me she prefers a simple example she can explore rather than read a book.

1. Gross profit margin
2. Net profit margin after tax
3. Return on capital employed (ROCE)
4. Return on equity
5. Economic margin
6. Profit margin
7. Markup
8. Ebitda

Are these UK terms or US terms and is there a difference ? I looked at some books on Amazon some of which were US. Should I only buy a UK book and is there a UK standard for small business accounting ?

Does anyone have a small business spreadsheet I can plagiarise ? I think if we can work up an example it will make more sense to both of us.

 

[Norm]

No. 2 daughter is doing a Business Studies A Level and asked me about profitability. I soon realised it's more complicated than I thought.

She has been asked to explain the following and like me she prefers a simple example she can explore rather than read a book.

1. Gross profit margin
2. Net profit margin after tax
3. Return on capital employed (ROCE)
4. Return on equity
5. Economic margin
6. Profit margin
7. Markup
8. Ebitda

Are these UK terms or US terms and is there a difference ? I looked at some books on Amazon some of which were US. Should I only buy a UK book and is there a UK standard for small business accounting ?

Does anyone have a small business spreadsheet I can plagiarise ? I think if we can work up an example it will make more sense to both of us.

I hope daughter is good with %'s

UK terms - some not so widely used - IMO.
i.e. Economic margin??? is that a benchmarked margin or a viability margin ? I'll have to look that one up.

Buy a UK book if you're going to buy one.

Yes there is a standard for UK small business acounting

Google financial ratios and accounting ratios it will give you

Wikipedia
Lloyds Business
Business link
and most will be revealed.

What do you want to see on the spreadsheet?
P&L
Balance Sheet
Cash Flow
or Book keeping
or don't you know

Good luck
P.M. if you want

 

[Sgt Bilco]

What's profit......

 

[Pip_UK]

Google tip

Hi OldBoy, Google has a 'define' keyword, which searches for definitions of your search term, instead of the search term itself. You need a colon after the define command, so for example, try typing this into the Google search box.

define: gross profit margin

HTH

 

[JohnnyOldBoy]

Lloyds Business
Business link
and most will be revealed.

That Lloyds page is good, thanks Norm.

 

[Billywhizz]

No. 2 daughter is doing a Business Studies A Level and asked me about profitability. I soon realised it's more complicated than I thought.

She has been asked to explain the following and like me she prefers a simple example she can explore rather than read a book.

1. Gross profit margin
2. Net profit margin after tax
3. Return on capital employed (ROCE)
4. Return on equity
5. Economic margin
6. Profit margin
7. Markup
8. Ebitda

You should be able to work through this OK, but it'll probably make more sense if you do a simple s/sheet yourself......

Easy bit - gross profit is defined as sale price minus cost of sale. The cost of sale can vary depending on how creative your accounts are, but normally doesn't include things like fixed overheads etc. Net profit is usually after deduction of such items. Profit is expressed in pounds, margin is the same thing but expressed as a percentage. Its the percentage of what figure (sale or cost) that catches most people out.

Gross profit margin - gross profit expressed as a percentage of the sale price. In accounting world its normally expressed as: (profit in £s divided by the selling price) x 100. This will give you a percentage. A lot of people confuse it with markup (see below)

Net profit margin after tax - same as above less whatever the tax is (could be corporation tax, sales tax etc.). Just apply a percentage for this example.

Return on capital employed (ROCE) - profit returned as a ratio of the capital in the business. For this example, just use a simple number that represents capital, and a figure to represent profit. If I remember correctly, capital is calculated as assets minus liabilities, and the profit figure is the EBIT number (see below).

Return on equity - almost the same as above, but it represents the return (profit) on a shareholders investment.

Economic margin - don't know this one. Maybe a US term

Profit margin - as gross profit margin but including overheads etc. in the cost value. Should be a lower percentage than gross profit.

Markup - how much you add to the cost price to get the sale price. This is the one that gets people confused. If you're adding a percentage for profit, it goes on the cost price. Not the same as profit margin which is calculated as above. Try the maths - a 20% markup is not the same as a 20 % profit margin.

Ebitda - Earnings before interest, tax, depreciation and amortisation. Again, a load of numbers (or percentages) to take off a profit figure (earnings). Interest and tax are what they say, depreciation can be used to value things like vehicles or equipment (so a 20k car could be depreciated at 25% a year for 4 years so you don't take the full hit in year one). Amortisation is similar to depreciation, you amortise costs over a period - could be something that you buy on day one of a contract that will be used for the full period - you effectively spread the cost across the period that you get the use of the item for.

It's harder to do this when you've not been given any numbers or %ages - I'd start by making the numbers up (sales / cost / markups / taxes etc.) and fix these in reference cells. I wouldn't think anyone will criticise the actual numbers, it's the calcs they'll be looking for.

I think I'll go and lie down now and get ready for the onslaught of replies and corrections......

 

[JohnnyOldBoy]

No. 2 daughter is doing a Business Studies A Level and asked me about profitability. I soon realised it's more complicated than I thought.

She has been asked to explain the following and like me she prefers a simple example she can explore rather than read a book.

1. Gross profit margin
2. Net profit margin after tax
3. Return on capital employed (ROCE)
4. Return on equity
5. Economic margin
6. Profit margin
7. Markup
8. Ebitda

You should be able to work through this OK, but it'll probably make more sense if you do a simple s/sheet yourself......

Thanks Billywhizz, this is great.

 

[Norm]

No. 2 daughter is doing a Business Studies A Level and asked me about profitability. I soon realised it's more complicated than I thought.

She has been asked to explain the following and like me she prefers a simple example she can explore rather than read a book.

1. Gross profit margin
2. Net profit margin after tax
3. Return on capital employed (ROCE)
4. Return on equity
5. Economic margin
6. Profit margin
7. Markup
8. Ebitda

You should be able to work through this OK, but it'll probably make more sense if you do a simple s/sheet yourself......

Easy bit - gross profit is defined as sale price minus cost of sale. The cost of sale can vary depending on how creative your accounts are, but normally doesn't include things like fixed overheads etc. Net profit is usually after deduction of such items. Profit is expressed in pounds, margin is the same thing but expressed as a percentage. Its the percentage of what figure (sale or cost) that catches most people out.

Gross profit margin - gross profit expressed as a percentage of the sale price. In accounting world its normally expressed as: (profit in £s divided by the selling price) x 100. This will give you a percentage. A lot of people confuse it with markup (see below)

Net profit margin after tax - same as above less whatever the tax is (could be corporation tax, sales tax etc.). Just apply a percentage for this example.

Return on capital employed (ROCE) - profit returned as a ratio of the capital in the business. For this example, just use a simple number that represents capital, and a figure to represent profit. If I remember correctly, capital is calculated as assets minus liabilities, and the profit figure is the EBIT number (see below).

Return on equity - almost the same as above, but it represents the return (profit) on a shareholders investment.

Economic margin - don't know this one. Maybe a US term

Profit margin - as gross profit margin but including overheads etc. in the cost value. Should be a lower percentage than gross profit.

Markup - how much you add to the cost price to get the sale price. This is the one that gets people confused. If you're adding a percentage for profit, it goes on the cost price. Not the same as profit margin which is calculated as above. Try the maths - a 20% markup is not the same as a 20 % profit margin.

Ebitda - Earnings before interest, tax, depreciation and amortisation. Again, a load of numbers (or percentages) to take off a profit figure (earnings). Interest and tax are what they say, depreciation can be used to value things like vehicles or equipment (so a 20k car could be depreciated at 25% a year for 4 years so you don't take the full hit in year one). Amortisation is similar to depreciation, you amortise costs over a period - could be something that you buy on day one of a contract that will be used for the full period - you effectively spread the cost across the period that you get the use of the item for.

It's harder to do this when you've not been given any numbers or %ages - I'd start by making the numbers up (sales / cost / markups / taxes etc.) and fix these in reference cells. I wouldn't think anyone will criticise the actual numbers, it's the calcs they'll be looking for.

I think I'll go and lie down now and get ready for the onslaught of replies and corrections......

VAT, you didn't mention VAT.

Great response but it reminded me to make it clear that all the numbers being discussed above are excluding VAT.

I.E "gross profit is defined as sale price minus cost of sale"

It may be thought that sale price might be what someone actually pays rather than an "accounting sale price"

 

[Billywhizz]

VAT, you didn't mention VAT.

Great response but it reminded me to make it clear that all the numbers being discussed above are excluding VAT.

I.E "gross profit is defined as sale price minus cost of sale"

It may be thought that sale price might be what someone actually pays rather than an "accounting sale price"

Cheers, you're right, it all excludes VAT. In accounting principles VAT kind of takes care of itself because you treat it as an inout / output value. In other words you pass on what you charge to the Govt, and recover what you pay out. Therefore there's a balancing figure to claim or pay (usually pay!). The principle holds that as long as you make the numbers consistent (ie the sales and cost numbers) either all include or exclude vat, the ratios remain the same. The only time you'd realistically make the figures inclusive is if you're not VAT registered.


"Sale price might be what someone actually pays.." - almost right - sale price IS what someone pays for it - there's no argument in accounting terms. What is paid is what gets accounted for...unless of course there are compelling circumstances......cash springs to mind

 

[JohnnyOldBoy]

Norm/Billywhizz,

Thank you for such great responses. I did buy a book on basic finance and using a combination of your information and the book produced a spreadsheet.

I was wondering about VAT so your responses yesterday were timely.

I have a couple of points for clarification ..........
Does car or van lease, insurance and fuel go in the operating expense ?
What type of asset is e-commerce website, is it a fixed asset ?

John

 

[Norm]

Norm/Billywhizz,

Thank you for such great responses. I did buy a book on basic finance and using a combination of your information and the book produced a spreadsheet.

I was wondering about VAT so your responses yesterday were timely.

I have a couple of points for clarification ..........
Does car or van lease, insurance and fuel go in the operating expense ?
What type of asset is e-commerce website, is it a fixed asset ?

John

Does car or van lease, insurance and fuel go in the operating expense ?

Yes

What type of asset is e-commerce website, is it a fixed asset ?

Many things within business expenditure can be classed with "some" flexibility as either an asset (balance sheet) or as an expense (P&L).
A one off purchase of a lowish value website could easily be classed as expenditure
An expensive developed website would probably have to be put into assets.

One reason for classing something as an asset or as expenditure is for tax treatment\efficiency.
An expenditure hits profit in the year of the expenditure and therefore reduces taxable profit.
An asset goes in to a schedule and is depreciated over a number of years and that amount is allowed in tax computations against THAT years profit so usually it is a smaller amount\reduces tax less than the P&L way.

BILLY

 

[WindyChuffer]

No. 2 daughter is doing a Business Studies A Level and asked me about profitability. I soon realised it's more complicated than I thought.

She has been asked to explain the following and like me she prefers a simple example she can explore rather than read a book.

1. Gross profit margin
2. Net profit margin after tax
3. Return on capital employed (ROCE)
4. Return on equity
5. Economic margin
6. Profit margin
7. Markup
8. Ebitda

Are these UK terms or US terms and is there a difference ? I looked at some books on Amazon some of which were US. Should I only buy a UK book and is there a UK standard for small business accounting ?

Does anyone have a small business spreadsheet I can plagiarise ? I think if we can work up an example it will make more sense to both of us.

FFS - tell her to stop being so fekkin lazy and read the books / research it in the library / Internet. How's she going to cope at Uni if she can't do some basic research herself?

 

[Norm]

FFS - tell her to stop being so fekkin lazy and read the books / research it in the library / Internet. How's she going to cope at Uni if she can't do some basic research herself?

Im happy that Research is asking other people what they know to assist or direct your learning.
Read the OP he /she hasn't asked for their arse to be wiped but some direct questions and specific advise as to Where to look.

Happy to help here .

Do you have any relevant contribution to make ????

 

[JohnnyOldBoy]

FFS - tell her to stop being so fekkin lazy and read the books / research it in the library / Internet. How's she going to cope at Uni if she can't do some basic research herself?

She is pretty busy with keeping up with night life, going out on the piss, hockey trips, part-time job etc etc

So I will continue to help where I can, but academically she is already leaving me behind. To my mind research takes many forms and the best source of information is from someone with real world experience. Also books are light on real world examples and anecdotes which can bring the topic to life.

 

[Billywhizz]

Does car or van lease, insurance and fuel go in the operating expense ?

Yes

What type of asset is e-commerce website, is it a fixed asset ?

Many things within business expenditure can be classed with "some" flexibility as either an asset (balance sheet) or as an expense (P&L).
A one off purchase of a lowish value website could easily be classed as expenditure
An expensive developed website would probably have to be put into assets.

One reason for classing something as an asset or as expenditure is for tax treatment\efficiency.
An expenditure hits profit in the year of the expenditure and therefore reduces taxable profit.
An asset goes in to a schedule and is depreciated over a number of years and that amount is allowed in tax computations against THAT years profit so usually it is a smaller amount\reduces tax less than the P&L way.

BILLY

+1 for car / van lease etc. going in operating expenses. Although there could be a capital amount that can be depreciated (a deposit or final value to pay if you buy the car at the end of the lease).

Website - I think you'd struggle with it as an asset as it has no actual (ie resale) value. The setup costs could probably be depreciated so it would end up as no value in x years. The running costs would be operating expenses, or you could probably put a fixed proportion into an advertising expense - depends how complex your accounts are.

Most of the stuff involved in business accounts could be compared to running your home life - assets which increase or decrease in value over their life (house, car, bike etc.), operating expenses (food, fuel, things that change with what you do, how your lifestyle changes), accruals, prepayments (saving up for fuel bills for something that you've had, prepaying your council tax for a service that you get in the next month). You could even (with a bit of imagination) say that profit is what's left each month after you've paid for everything ie savings.....if you're lucky enough to have that!

 

[Team Orange]

What's profit......

Thats where someone tells you what's going to happen