financial analysis

• Total equity

  the total of all the money that has been put into the business
• Liabilities

  the money the business owes
• Capital

  money invested into the business
• Assets

  resources owned by a business

  they provide a financial benefit to the business - given a monetary value on the balance sheet
• Non-current assets

  assets that the business is likely to keep for more than a year.

  they often lose value over time - depreciation
• Current assets

  the assets that a business is likely to exchange for cash within the accounting year
• Net assets

  total current assets - total current liabilities
• Current liabilities

  debts which need to be paid off within a year eg. overdrafts
• Non current liabilities

  debts that the business will pay off over several years
• Working capital

  current assets - current liabilities
• Value of cash for a business

  Businesses need just enough cash to pay off their short-term debts.

  When a business expands it needs more cash to avoid overtrading
• Capital expenditure

  money used to buy non-current assets

  businesses need capital expenditure to start up, grow and replace equipment
• The effects of too much and too little stock

  Too much stock = money tied up in stock instead of working for the company

  Too little stock = loss of sales
• Debtors

  people who owe money to the firm
• Assets depreciation

  most assets lose the value overtime - the longer a business has them, the less they're worth

  depreciation - drop in value of a business asset overtime
• Measures of profit in an income statement

  gross profit , operating profit , profit before tax , profit after tax and retained profits
• What two ways will businesses use their profits?

  pay dividends to shareholders

  keep the profit in the business as retained profit
• Short term benefits of balance sheets

  suppliers = interested in working capital and liquidity

  balance sheets shows how much the business is worth

  can identify internal strengths and weaknesses
• Long term trends seen in balance sheets

  a quick increase in non current assets indicates that the company has invested in property and machinery

  financial performance

  increase in reserves = increase in profits
• Evaluation of using balance sheets

  only about the past so can't predict the future

  doesn't give any clues about the market or economy they are operating in
• Evaluation of using income statements

  there are no mention of internal and external factors

  can be deliberately distorted
• Financial ratios

  gearing , ROCE , current ratio , liquidity and inventory turnover
• Value of financial ratios

  good way to look at business performance

  managers can use it for decision making

  compare ratios with other businesses
• Limitations of financial ratios

  doesn't take into account non-numerical data

  future changes such as technological advancements can't be predicted