That Sales are growing does not mean this is good because the cost price of goods sold is also increasing faster than Sales. The increase in sales figures may be due to the mark-ups of Louise to the Cost price.
Louise is therefore selling a lower volume of goods but at higher prices as confirmed by the - 2% figure above, even though in Year 5, sales grew by 20% after Louise dropped gross margins from 30% to 25%.
The gross margin is the ratio of gross profit to Sales and is the mark-up Louise adds to the cost of her products, whilst the net margin is the ratio of net profit to Sales after expenses are deducted from gross profit.
Declining (- 4%) gross profits means sales are not increasing as fast as Cost price of goods, whilst the increase (14%) in net profits only means that Louise is controlling her expenses better, as shown by the 17% Average Sales/Expenses figure.
Louise can improve the management of her business by spending more on marketing to increase demand and Sales figures. This would result in higher expenses, but it would increase Sales at a faster rate than the Cost price of goods and would result in an increase in net profits. Unless Sales increase, Louise's profits will be squeezed.
If the capital of 60,000 in Year 1 is assumed to be the total she invested in the business, which includes initial inventory, improvements on the premises, furnishings and equipment, the van, ...Show more