Every company publishes a balance sheet at the end of each fiscal year (FY)
Assets - a summary of all resources owned by or owed to the company
Liability - a summary of all financial obligations of the company
Net Worth - a summary of the financial value of ownership
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Balance Sheet Relationship Assets = Liabilities + Net Worth Net Worth = Assets - Liabilities Net Worth also called: Owner’s Equity or Proprietorship A = L + P P = A - L
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Profit & Loss Statement Statement of Financial Performance
The basic equation for profit is:
Profit = Sales - Costs
P & L Statement shows an organisation’s sales revenues and costs over a given period, typically a year, quarter or month.
A well-written statement can help in identifying the areas of the business associated with profit or loss.
Assessment can be based on a division, department, business unit, product line, etc.
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Example Profit & Loss Statement Net Sales $ 707,500 Less cost of goods sold $ 340,000 Gross Margin (gross profit) $ 367,500 Less operating expenses $ 325,500 Net Profit $ 42,000 Note: Tax is calculated on the Net Profit
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The Gross Margin Percentage Gross Margin Percentage is the percentage of revenue available to cover expenses and provide profit after the cost of goods sold has been paid. Gross Margin Percentage = Net Sales Gross Margin $707,500 $367,500 = = 0.52 or 52%
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The Net Profit Percentage The Net Profit Percentage (Net Income ratio) identifies the percentage of profit from each sales dollar. Net Profit Percentage = Net Sales Net Profit $707,500 $42,000 = = 0.06 or 6%
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The Operating Expenses Ratio The Operating Expenses Percentage is the percentage of operating expenses needed from each sales dollar. Operating Expenses Ratio = Net Sales Total Operating Expenses $707,500 $325,500 = = 0.46 or in percentage 46%
Defined as the ratio of net profit to assets of an organisational segment (company, division, business unit, or the like), product line or brand.
It is a measure of financial efficiency that is often used to set marketing objectives.
The information required for calculating return on assets is obtained from the organisation’s balance sheet and profit and loss statement.
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Example ROA Calculation ROA = Net Profit / Total Assets Suppose that the total assets for the organisation is $425,000 and the net profit is $42,000. ROA = 42,000 / 425,000 = 0.0988 or 9.88 %
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ROI Return on investment ROI = Net Profit / Net Worth This shows the profitability of shareholders’ equity. Suppose that the total assets for the organisation is $425,000, the net profit is $42,000 and the total liabilities are $200,000. ROI = 42,000 /( 425,000 – 200,000) = 0.187 or 18.7%
These need to be viewed cautiously as they are sensitive to initiatives such as outsourcing, and can vary greatly with the nature of the business – e.g.capital vs labour intensive.
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The Stock Turnover Ratio The Stock (Inventory) Turnover Ratio indicates the number of times stock turns over (sold) during the period specified in the profit and loss statement. The calculation is done in two steps as follows: Average Stock = 2 Beginning Stock + Ending Stock 2 $100,000 + 160,000 = = $130,000
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The Stock Turnover Ratio - Cont. Stock Turnover Ratio (Retail) = Average Stock Net Sales $130,000 $707,500 = = 5.44 times per period Stock Turnover Ratio (Cost) = Average Stock Cost of Goods Sold $130,000 $340,000 = = 2.62 times per period
Defined as the effect of a change in price on the quantity of product demanded.
It involves calculating the ratio of the percentage change in quantity to the percentage change in price.
E = Elasticity Q 1 = Initial quantity demanded Q 2 = New quantity demanded P 1 = Initial price P 2 = new price E = (Q 1 - Q 2 ) / Q 1 (P 1 - P 2 ) / P 1
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Example Price Elasticity Calculation Suppose that the initial price was $5 and the initial quantity demanded was 100 units. If the price was raised to $6 and the quantity demanded declined to 90 units, then the Price Elasticity would be: Normally stated as 0.5 E = (100 - 90) / 100 (5 - 6) / 5 0.1 - 0.2 = = - 0.5
There are several factors to consider when deciding on the order size at which total costs can be minimised.
The main factors include:
Annual demand in units,
unit cost of placing an order, and
Annual holding costs as a percentage of the cost of one unit.
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Example Annual demand 5,000 units Unit cost of the merchandise $ 1.50 Per-unit holding costs $ 0.30 ( 20% of unit cost ) (warehousing, insurance, etc.) Cost of placing an order $ 5.00 2 x (Annual demand in units x Unit cost of placing an order) Annual holding costs as a percentage of cost of one unit x Cost of one unit in dollars EOQ =
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Cont. 2 x ( 5000 x $5 ) 0.2 x $1.50 EOQ = $50,000 $0.30 = = 408.25 units per order
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Stock Cycle time trigger level order order order order order stock level initial stock
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