Transcript of "Standard Grade Business Management - Ratios"
HOW DO BUSINESSES KNOW THEY ARE MAKING A PROFIT? <ul><li>Profit is the difference between the money received from the sale of a good and service and the cost of providing the good or service. </li></ul><ul><li>Very simply: </li></ul><ul><li>PROFIT = SELLING PRICE – COST PRICE </li></ul>
The Final Accounts <ul><li>Final Accounts are the summary financial statements produced at the end of each year’s trading. They include: </li></ul><ul><li>The Trading Account </li></ul><ul><li>Profit & Loss Account </li></ul>Usually prepared together <ul><li>and </li></ul><ul><li>The Balance Sheet </li></ul>
The TRADING ACCOUNT shows the Gross Profit – profit made from buying and selling goods. It is not the final profit. The PROFIT & LOSS ACCOUNT shows the Net Profit – the final profit. It is the Gross Profit add income from any other sources minus any expenses. THE FINAL ACCOUNTS
THE FINAL ACCOUNTS If we are dealing with a Sole Trader, then the profit is all theirs. However, the profit is divided between all of the owners in a partnership or company. This is done in the APPROPRIATION ACCOUNT. The BALANCE SHEET is like a snapshot of a business, showing what the business has and what the business owes. It shows the overall value of a business.
How does a business know if it is doing well? The profit figure can be a good guide as to whether a business is performing well. Certainly, a profit is better than a loss.
Which business is doing best? Take these 2 businesses and look at their profits: Profits of more than £2 billion vs Profits of £15,000 George’s Groceries
Financial Ratios Tesco is a large multinational company whereas George’s Groceries is a small local business. It is therefore more meaningful to use ratios to analyse the performance of a business rather than comparing figures.
Using Ratios With ratios, businesses can compare their own performance over a period of time and they can also compare themselves to other similar businesses .
<ul><li>There are 3 areas to be analysed: </li></ul><ul><li>Profitability </li></ul><ul><li>Liquidity </li></ul><ul><li>Efficiency </li></ul>
PROFITABILITY RATIOS ~ compare profits with sales, expenses and capital <ul><li>Gross Profit as a Percentage of Net Sales </li></ul><ul><li>Net Profit as a Percentage of Net Sales </li></ul><ul><li>Return on Capital Employed </li></ul>
LIQUIDITY RATIOS ~ look at a business’s ability to pay its everyday expenses <ul><li>Working Capital Ratio (sometimes referred to as The Current Ratio) </li></ul><ul><li>Acid Test Ratio </li></ul>
EFFICIENCY RATIOS ~ look at how efficient the business is operating <ul><li>Rate of Stock Turnover </li></ul>
How do we calculate the ratios Gross Profit Percentage Gross Profit Net Sales X 100 = ? %
How do we calculate the ratios Net Profit Percentage Net Profit Net Sales X 100 = ? %
How do we calculate the ratios Return on Capital Employed Net Profit Opening Capital X 100 = ? %
How do we calculate the ratios Working Capital Ratio Current Assets Current Liabilities = ?:1
How do we calculate the ratios Acid Test Ratio Current Assets - Stock Current Liabilities = ?:1
How do we calculate the ratios Rate of Stock Turnover Step 1: Calculate the Average Stock Opening Stock + Closing Stock 2 Step 2: Calculate the Rate of Stock Turnover Cost of Goods Sold Average Stock = ? times = Average Stock