Sales growth
It is important to be able to measure the sales growth of your business
from year to year for the following reasons.
1. It will help you understand how your business is performing
and whether it is growing or standing still. Because business
running costs will probably escalate each year broadly in line
with infl ation, you need to ensure that your sales do likewise.
Otherwise you may fi nd that your profi t falls from year to year.
2. A bank or fi nance company will like to see your business achieving a
continuous growth in sales from year to year. This will reassure them
that your business is worthy of their support.
The formula for calculating sales growth is:
Increase in sales Year 1 to Year 2, divided by sales Year 1, multiplied
by 100.
Let’s look at an example to illustrate this point:
Example
XYZ Pty Limited
$
Sales in 2004 100,000
Sales in 2005 125,000
Increase 25,000
Using the formula above, the calculation would be:
$25,000 divided by $100,000 multiplied by 100 = Sales growth of 25%
Gross profit margin
This ratio is also sometimes called gross profi t percentage.
Earlier we discussed how you can use gross profi t margin to help you
monitor the progress of your business and to work out the breakeven
amount of sales.
It is calculated as follows:
Gross profi t divided by sales, multiplied by 100
This ratio is important for managing the fi nancial position of your
business because it enables you to not only see how your gross profi t
margin changes over time (and ensure that it is not falling) but also can
help you try to improve the profi tability of your business.
ACCOUNTING FOR NON-ACCOUNTANTS 47
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