What is turnover?
The number of product sales
Describe the purpose of a balance sheet.
A balance sheet allows an organisation to calculate its value/worth at a particular point in time. It shows the organisations assets and liabilities
Distinguish between fixed and current assets?
Current assets are short term assets (last less than a year) e.g. Stock, whereas fixed assets are long term assets (last longer than a year) e.g. Machinery
What are dividends?
Dividends are payments made to shareholders.
What are debtors?
Debtors are people who owe the organisation money having bought goods on credit
What are creditors?
Creditors are people the organisation owes money to
What is working capital?
Working capital is the organisations ability to pay off short term debts. Current liabilities deducted from current assets
Describe sources of finance a large organisation could use.
- Share issuing is when a plc issues shares to new or existing shareholders. Selling shares is a way of obtaining large amounts of capital that cannot be paid back.
- Leasing is when an organisation rents its equipment or premises rather than buying it.
- Venture capitalists (business angels) provide large loans to an organisation that other lenders may refuse to finance. The venture capitalist will take part ownership of the business in return.
How could an organisation improve cash flow?
- Introduce a Just-In-Time stock control system
- Encourage debtors to pay bills using discounts
- Increase promotion to raise awareness of products
- Sell fixed assets that are not required
- Purchase cheaper supplies
Justify the use of 3 sources of finance.
Bank loan
- Is flexible and can be paid back over time, helping cashflow
- Large amounts of finance can be obtained
Grant
- Large amounts of capital can be obtained
- Money does not have to be paid back
Overdraft
- Can prevent the organisation from getting into debt
- Interest is only paid on the amount borrowed
Share issuing
- Large amounts of capital can be obtained
- Money does not have to be paid back
Venture capitalist
- May be easier to obtain than a bank loan
- Large amounts of finance can be obtained
How could an organisation improve efficiency?
- Increase number of sales
- Purchase cheaper materials
- Reduce cost of manufacturing
What is return on capital employed (ROCE)?
Return on capital employed is the measure of money made from investments in the organisation
Compare liquidity ratios with profitability ratios.
Liquidity ratios measure how able an organisation is to pay off debt whereas profitability ratios measure the money made by the organisation
Give 2 examples of profitability ratios.
Gross profit percentage ratio
- Shows profit from buying and selling goods
- High % is good
- Shows the gross profit made for every £1 of sales
- Gross profit/Sales x 100 = %
Net profit percentage ratio
- Shows profit made once expenses are deducted from gross profit
- High % is good
- Shows net profit made for every £1 of sales
- Net profit/Sales x 100 = %
Return on capital employed ratio
- Shows the return on capital invested by the owner or shareholder in the organisation
- High % is good
- Shows the return for every £1 invested
- Net profit/Capital employed x 100 = %
Give 2 examples of liquidity ratios.
Current ratio
- Shows the organisations ability to pay of short term debts
- Ideal ratio 2:1
- Current assets/Current liabilities :1
Acid test ratio
- Shows the organisations ability to pay off short term debts without selling stock
- Acceptable ratio 1:1
- Current assets - Stock/Current liabilities :1
Give an example of an efficiency ratio.
Stock turnover ratio
- Shows the length of time stock is held
- If stock is held for long periods of time stock levels may be too high
- If stock is held for short periods of time it may be due to a JIT stock management scheme
- Cost of sales/Average stock = Time
What may be a drawback to using ratio analysis?
- Figures collected are from past data and cannot predict future figures
- External factors are not considered making it difficult pinpoint why figures are the way they are
- Workforce related factors such as motivation are not considered making it difficult to pinpoint why figures are the way they are
- Product development and research periods are not taken into account but have a big impact on figures - may be unclear why losses are made
- It can be difficult to compare data to other organisations as the organisation must be the same size for the data to be valid
Distinguish between a trading account and a profit and loss account.
A trading account shows the profit made from buying and selling goods (gross profit) whereas a profit and loss account shows the profit made once expenses have been deducted from the gross profit (net profit).
Justify the use of a cash budget.
- Can help identify cash flow issues
- Can help identify money available for purchases
- Can help predict when a loan or external source of finance may be required
- Can allow an organisation to compare predictions to actual figures
Why might an organisation experience cash flow problems?
- Too much money tied up in stock
- A very long credit period given to customers who owe the organisation money
- Not enough income from sales
- A very short credit period being offered by creditors or suppliers
- To much money being taken out by owners
- Large sums of money being spent on items such as machinery
- Sudden increase in operating expenses
