7.2 managing inventory and supply chains

balance sheet

shows the net worth of a business by looking as assets and what the business owes (liabilities, equity)

assets def

• non current

  • asset has a useful life of more than a year - these assets depreciate

  • intangible assets

  • land

  • vehicles

• current assets

  • lifespan of less than a year

  • inventories (stock)

  • receivables

  • cash

liabilities

• non current

  • sources of finance that do not have to be paid back within a year

  • loan

• current liabilities

  • owed within a year

  • overdraft

  • payables

  • tax

equity

a liability as it does not belong to the company, includes money invested into the business by its owners, eg shareholder funds, retained profit

net assets

total assets - total liabilities

net current assets

current assets - current liabilities

assets

liabilities - equity

equity

assets - liabilities

depreciation

the reduction in the value of an asset over time due to wear, tear, or obsolescence

liquidity

how easy it is to convert assets into cash

liquidity of business assets

most liquid

• cash

• receivables

• inventories

• lorry

• factory

who is interested in the balance sheet

• shareholders

  • see what business is worth and where retained profit is going

• suppliers

  • lending business money (trade credit)

• customers

  • buying items, need to make sure the business doesn’t go bankrupt

• creditors

  • bank

  • see risk of loaning to a business

• government

  • legal requirement

income statment

shows income and expenditure and the resulting profit or less at the end of the financial year

exceptional items

large one off payments or revenues (cost of expansion overseas)

extrodinary items

infrequent transactions such as joint ventures or subsidies

window dressing accounts

when a company manipulates their accounts to make it look like they have preformed worse or better

ROCE

• operating profit / (total equity + non current liabilities) X 100

• total equity = non current liabilities = capital employed

current ratio

current assets / current liabilities

improving short term liqidity

sell current assets

why is a 1.5 : 1 current ratio an issue

• 2 : 1 id a good current ratio, twice as many current assets as current liabilities

• issues

• limited buffer for unexpected expenses

• possible cash flow strain if assets are not quickly liquid

• lenders and investors might view it as moderate rather than strong liquidity

gearing ratio

• measures the long term liquidity of the business

• shows the proportion of capital financed by loans

• non current liabilities / capital employed X 100

• capital employed = total equity + non-current liabilities

capital employed

equity + non current liabilities

advantage of being highly geared

• company relies heavily on borrowed funds

• 4:1, 4 times more debt than equity

• less profits being given in dividends

• less loss of control as less shares are sold top raise capital

disadvantage of being highly geared

high interest payments

profitability ratios

allow us to look at the profit as a proportion of revenue (margin) or in relation to capital employed (invested) in the business (ROCE)

inventory turnover

cost of sales / inventory (avg)

factors effecting inventory turnover

• nature of product (perishable)

• length of product life cycle / fashion

• stock management systems in operation

• high added value products

receivable days

• receivables / revenue X 365

• aim is to be lower than payable days

payable days

payables / cost of sales X 365

limitations of using ratios to analyse performance

• intra - may not be fair

• final accounts see consolidated so may be difficult to see how one business has done

• inter - may not be valid as businesses ae different it terms of size and markets

• window dressed accounts

• non-financial data may be a better judge of success

intra

within the organisation

inter

between organisations