Areas of focus - Business

Why are accurate financial documents needed?

Why are accurate financial documents needed?

To ensure the correct goods are delivered in the correct amount to the customer

To avoid undercharging or overcharging for goods

To allow managers to make strategic decisions

Problems with inaccurate financial documents

Not all costs are accounted for

Investors may lose confidence in the business

Can damage the business reputation

Can lead to cashflow problems

What is a statement of comprehensive income?

Shows the financial performance of an enterprose of an enterprise at a point in time

How is turnover improved?

• Increase price

• Advertise more to increase sales

• Bring out new products

How can costs be reduced

• Find a cheaper supplier

• Reduce the size of the workforce

• Reduce overhead costs

What is a statement of financial position?

Also known as a balance sheet, it balances two things;

• How a business is funded

• How a business is using these funds

Components of a statement of financial position

• Fixed assets

• Current assets

• Current liabilities

• Net current assets

• Total assets less current liabilities

How are net current assets calculated?

Current assets - Current Liabilities

How are total assets less current liabilities calculated?

(Fixed assets + Current assets) - Current liabilities

How to know if an enteprise can pay it’s short term liabilities?

Net current assets

If negative, the business can’t pay it’s short term debts

How to know the value of debtors?

Debtors in current assets

If larger than other current assets, there may be risk that customers won’t pay the business back.

How to know if the business can take a loan to expand?

Long term liabilities

If large, the business may struggle to get additional finance.

How to know if the business has made a profit?

Retained Profit

Can be compared with figures from previous years to know whether they have made a profit or loss.

What are the main sources of capital

• Internal

  Share capital

  Retained Profit

• External

  Bank loan

  Other investors

What is the difference between profitability and liquidity

• Profitability expresses profit as a percentage of revenue

• Liquidity expresses the ability of an enteprise to pay back it’s debt

Examples of profitability ratios

• Gross Profit margin

• Net profit margin

Examples of liquidity ratios

• Current ratio

• Liquid capital ratio

What does positive liquidity show?

• Cash inflows over time, are greater than cash outflows

• Will have cash to pay for purchases

What does negative liquidity show?

• Cash inflows are LESS than cash outflows

• Will NOT have sufficient cash to pay for purchases

How to calculate current ratio

current assets/curent liabilities

How to calculate liquid capital ratio

(current assets - inventory)/current liabilities

What causes the break even point to lower?

• Decrease in costs

• Increase in selling price

• Sales increase

What does a lower break even point mean?

• More profit

• Fewer sales required to reach break even

What causes a break even point to increase?

• Increase in costs

• Decrease in selling price

• Sales reduction

What does a higher break even point mean for the business?

• LESS profit

• Margin of safety decreases

• Has to take actions to reduce

What is a margin of safety?

This is the difference between actual output and the break even point

Why could having a large margin of safety be important?

• Shows the enteprise is less sensitive to a fall in sales

• Shows the business is more likely to make profit, putting it in a secure position

• It allows the business to consider changing the selling price to gain market share from competitors

Limitations of break even analysis

• All inventory may not be sold= lower revenue

• Workers may work overtime= more wages= costs increase

• Discount for buying in bulk - costs will decrease