Finance Doc1

1. Lesson plan 17
Module: Finance
Topic: Financial Ratio Analysis
Year: 11
Period: one hour
Ability: mixed
Aim: help students to understand how profitability ratio analysis helps to assess
business profitability.
Objectives of the lesson:
to understand the meaning of % net profit;
to understand the meaning of % of gross profit;
to learn how to calculate ratios;
to understand how businesses can improve their profitability;
to analyse and investigate business actions used to improve their profitability;
to appreciate the interdependence of different functional areas in a business.
Phase 1 Introduction
5-7 minutes
1. State clearly the objectives of the lesson.
2. Link the new topic to students’ prior learning about how businesses are structured
and its functional areas.
Phase 2 Development
45-50 minutes
Stage 1 how to use ratios 5 minutes
The profitability ratio diagram
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2. Assessing a business
profitability
Profit & loss
Trading account
account
Gross profit Net profit
% gross % net
profit profit
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3. How to use ratios in the exam
Comparing
ratios
Interpreting
ratios
Calculating ratios
Obtaining data –which account?
Stage 2 obtaining the data – which account?
Activity “Where do I belong?” 7-10 minutes
First, individually students are going to carry out this activity, and then have it
discussed with by whole class.
Stage 3 calculations of ratios
% Gross profit and % net profit
1. % Gross profit
Remember
Sales Revenue – Cost of Sales = Gross profit/loss
1. Look closely at the following formula
Gross profit
-------------------------- X100 =Gross profit margin
Sales revenue/turnover
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4. For example, at the end of 2002, Roberts Ltd’s gross profit was £1000 and its sales
revenue was £10,000, therefore its % gross profit is 10%.
The higher this ratio is the better it is.
2. % Net profit
Remember
Gross profit – other expenses + other sources of income = net profit
Look closely at the following formula
Net profit
-------------------------- X100 = Net profit margin
Sales revenue/turnover
For example, if Roberts Ltd net profit at the end of 2002 was £500 and its sales
revenue was £10,000, then its % net profit is 5%.
Stage 4 Interpretations of ratios
In the above example Robert Ltd’s % gross profit and % net profit were 10% and 5%,
which indicate that the business profitability is poor/low.
The higher the ratios are the better the business profitability position.
Stage 5 comparisons of ratios
Look at Roberts Ltd’s % gross profit and % net profit over a period of time.
Year 1998 1999 2000 2001 2002
% gross 45% 35% 25% 15% 10%
profit
% net profit 30% 20% 15% 10% 5%
Comparison means working out a trend over a period of time.
Stage 6 Suggestions to improve gross profit margin (reflection)
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5. Scenario 1
James Woods sells quality dinning table furniture. At the end of 2002 the gross profit
James Wood business was £10,000, and the total sales revenue was £100,000.
3. Work out James Woods’ Gross Profit Margin at the end of the year.
4. Suggest how James could improve his percentage gross profit.
5. Choose the right strategies from the ones below and explain your reasons in
the table below.
 Improve James Woods’ Advertising Strategy
 Use less heating
 Launch a new marketing campaign
 Move to a cheaper location
 Reduce cost of sales
 Improve the quality of furniture.
 Buy cheaper raw materials
 Employ less workforce
 Use better below the line promotion
 Use better technology
 Reduce wastages in raw materials
 Increase the selling price
6. Students are going to be encouraged to come up with suggestions to improve
% gross profit or gross profit margin. For a few minutes students are going to
work individually to suggest ways to improve James Woods’ gross profit
margin. This will be followed by a whole group discussion.
Strategies to improve % gross Reasons
profit
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6. Scenario 2
If James Woods’ other expenses in 2002 were as follows:
Wages £2000
Heating and lighting £1000
Transportation £500
Advertising £500
Depreciation £300
Bad debts £700
Insurance £500
Rent £ 2500
1. Work out James Woods’ Net Profit Margin at the end of the year.
2. Compare James’s % net profit with his percentage gross profit.
3. Suggest how James could improve his percentage net profit.
4. Choose the right strategies from the ones above and explain your reasons in
the table below.
Strategies to improve % net Reasons
profit
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7. Phase 4 Home work/conclusion
and end 5 minutes
Where Do I belong?
Fill in the empty gaps in the table below.
Information figure/ratio I belong to …………….
Sales revenue
Gross profit
Net profit
Operating profit
Net profit margin
Gross profit margin
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8. Capital/ assets employed
Cost of Stock
Current assets
Current liabilities
Working capital
Dividends
Retained profit
Depreciation
Wages
Bad debts
Tax
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9. Answer Sheet
Information figure/ratio I belong to …………….
Sales revenue Profit and loss account (trading
account)
Gross profit Profit and loss account (trading
account)
Net profit Profit and loss account
Operating profit Profit and loss account
Net profit margin Profit and loss account
Gross profit margin Profit and loss account (trading
account)
Capital/ assets employed Balance sheet (long term
liabilities)
Stock Profit and loss account (trading
account) Balance sheet.
Current assets Balance sheet
Current liabilities Balance sheet
Working capital Balance sheet
Dividends Profit and loss
Balance sheet (liabilities)
Retained profit Profit and loss and balance sheet
Depreciation Profit and loss account
Wages Profit and loss account
Bad debts Profit and loss account
Tax Profit and loss account
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10. Activity
Scenario 1
James Woods sells quality dinning table furniture. At the end
of 2002 the gross profit for James Woods’ business was
£10,000, and the total sales revenue was £100,000.
7. Work out James Woods’ Gross Profit Margin at the end of the year.
8. Suggest how James could improve his percentage gross profit.
9. Choose the right strategies from the ones below and explain your reasons in
the table below.
 Improve James Woods’ Advertising Strategy
 Use less heating
 Launch a new marketing campaign
 Move to a cheaper location
 Reduce cost of sales
 Improve the quality of furniture
 Buy cheaper raw materials
 Employ less workforce
 Use better below the line promotion
 Use better technology
 Reduce wastages in raw materials
 Increase the selling price
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11. 10. Come up with suggestions to improve % gross profit or gross profit margin.
For few minutes students are going to work individually to suggest ways to
improve James Wood gross profit margin. This will be followed by a whole
group discussion.
Strategies to improve % gross Reasons
profit
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12. Scenario 2
If James Woods’ other expenses in 2002 were as follows:
Wages £2000
Heating and lighting £1000
Transportation £500
Advertising £500
Depreciation £300
Bad debts £700
Insurance £500
Rent £ 2500
5. Work out James Woods’ Net Profit Margin at the end of the year.
6. Compare James % net profit with his percentage gross profit.
7. Suggest how James could improve his percentage net profit.
8. Choose the right strategies from the ones above and explain your reasons in
the attached table.
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13. Strategies to improve % net Reasons
profit
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14. H. Seliet 14
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