Analyses of Profitability of Company

Question: Discuss about the Analyses of Profitability of Company. Answer: Introduction This report guides the owner of splash on the profitability of company and also guides on how business profitability can be improved. Apart from this, it guides on what additional reports can help the owner in business decision making process. Analyses of Profitability of Company As seen from the profit and loss summary account it can be seen that company has earn the profit of $1679.00 in the month of December and it is expected that net profit will rise in future months depending on the growth of business. On looking at the profit and loss statement it can be said that business has earned the revenue of $ 40,891.00 in month of December and cost of sales cost $28,062.00 in the same month. So, according to profit and loss account the gross profit of company is 31.37% and it amounts to $12,829.00. So it can be said that overall gross profit was excellent. Other expenses amounts to $ 11,150.00 that includes amount paid to advertising, cleaning, electricity, rent, internet and wages. After deducting the expenses from the gross profit, the net profit calculated as $1,679.00. Below is the profit and summary of Splash business for December month: Profit and Loss Account for Splash Company Particulars Type Amount ($) Sales Other Income $ 32,563.00 Sales - Race Income $ 828.00 Sales Train Income $ 7,500.00 Income Total Income $ 40,891.00 COS Other Cost Of Sales $ 22,062.00 COS Train Cost Of Sales $ 6,000.00 Cost Of Sales Total Cost Of Sales $ 28,062.00 Gross Profit $ 12,829.00 Advertising Expense $ 3,500.00 Cleaning Expense $ 125.00 Electricity Expense $ 125.00 Internet Expense $ 150.00 Rent Expense $ 1,250.00 Salaries and Wages Expense $ 6,000.00 Expense Total Expense $ 11,150.00 Operating Profit $ 1,679.00 Other Income Total Other Income $ - Other Expense Total Other Expense $ - Net Profit $ 1,679.00 Profitability Ratios These ratio shows the profitability of the company for the period calculated. It shows percentage of profit earned in various contexts. Gross profit ratio: This ratio tells the percentage of gross profit earned on net revenue for the period. Gross profit is calculated as net revenue less cost of sales (Bull, 2007). Formula: Gross profit/Net revenue Gross profit percentage: $ 12,829.00/$ 40,891.00 = 31.37% Net profit percentage: This ratio tells the net profit earned by the company on the amount of sales revenue. This ratio is very important from the point of business owner and investors. Formula: Net profit/Net revenue Net profit percentage: $ 1,679.00//$ 40,891.00 = 4.10% Five Recommendations to the owner to improve the profitability of the company Recommendations It is highly advice to the business owner to control the expenses. It can be done through minimizes the wages paid to the staff and to find the staff with multiple capabilities that can perform various operations. Increase the margin through asking discount from the suppliers and increase the sales price of goods that have huge requirement in the market. It is advised to the owner to reduce the market cost through use those methods that gives maximum profits and stop using the methods that does not help in sales. Owner must keep a watch on inventory stock as piling of inventory gives rise to extra carrying cost as well as requires huge storage space. Therefore it is advised to make an order of purchase as and when required. Free add-on- sales helps in increasing the sales of products that have low sales quantity (Drake and Fabozzi, 2012). Reports that helps Splash in making the business decisions Cash flow forecast reports helps the owner to check for the forecast of cash to be received and it can be check from reports. References Bull, R. 2007. Financial Ratios: How to use financial ratios to maximise value and success for your business'. Elsevier. Drake, P. P. and Fabozzi, F. J. 2012. Analysis of Financial Statements. John Wiley Sons.