# Formulas – Financial encyclopedia

Being able to break down complex reports into understandable numbers can be said to be the core reason for using formulas. Studying a yearly report from any company, one is easily overwhelmed by the magnitude of information given.

But, by using formulas to break down the yearly statement into understandable fragments, one is able to analyse if the company is making a profit. This is what economic formulas is all about. To give you as an analyst a handy tool to make valid business decisions.

However, the result given by the formula will always depend on the validity of the source. One could argue that increased sales, always leads to increased profits. But this is not necessarily true.

Let’s say you managed a factory that made shirts. Each machine was able to produce one hundred shirts per month. One month an order for 120 shirts was placed by a customer. In order to accommodate this order, the factory needs to invest in a second machine. However, since each machine produces 100 shirts per month, you would have to discharge 80 shirts from the second machine in order to complete the order. From this we can calculate the following; 100 shirts times £5 per shirt = £ 500 200 shirts times £5 per shirt = £1000 – 80 shirts discarded times £5 = 400

At the outset it seems like a null-sum game, but what we haven’t included in our calculation is the investment in the second machine. Hence, the factory will make a loss from the outset if it accepts an order that is above the production capacity (as long as it can’t increase the sale twofold).

Financial formulas can be difficult to get your head around at first. But as long as you practise in using them, they become more and more simplified. And this is what we aim to present in our encyclopedia – simplified formulas that everyone can use to their advantage.

As with other areas of the financial encyclopedia, it might not be academically approved. Therefore use caution in using this as a main source for your academic work. Consult your academic lecturer/ professor about using this web-site. Alternatively, use the web-site along with other academically approved sources.

Should you find that a formula is missing from our library, please do not hesitate to contact us. Then we will do our outmost to include it in our next update.