Recalculating Profits: Business Models: Formulae and Terms
Often the first source of information you have about a business is the Standard Accounts Information (SAI) or the accounts. You need a detailed knowledge of how a business works to be able to test whether the figures shown are realistic.
You can gain some insight from looking at the relationships between certain entries.
EM3080 explores the use of Business Ratios when examining records. EM3508 looks in particular at the use of Gross Profit Rate to test the credibility of records, particularly in relation to distributive or retail trades.
The Gross Profit Rate formula is one of the most common ratios used both in terms of examination of business records and in the recalculation of profits once you have reason to believe that the return figure is incorrect.
However, you will normally find that most retail traders are more familiar with Mark-up Rates (MUR). Traders tend to think more in terms of the profit margin which they add to purchases to get to the selling price rather than the overall GPR. The different meanings are explained in more detail in EM3504.
These ratios form the basic tools of any business economics exercise or model therefore you will have to be confident in the use of the formulae and able to explain any calculations you have prepared to recompute the profit figure to the taxpayer.
In practice you will often use short-cut formulae to construct models of the effect of different product mixes or levels of wastage. The most commonly used are
Gross Profit Rate
Mark Up Rate ÷ (Mark Up Rate + 100) x 100
Mark Up Rate
Gross Profit Rate ÷ (100 - Gross Profit Rate) x 100
(Calculated GPR - 0% wastage) ÷ (100 - % wastage) x 100
Achieved Mark Up Rate
Achieved GPR ÷ (100 - Achieved GPR) x 100