Analysing Financial Performance of a Business

• Financial Statements


  -allow shareholders, managers and investors to make informed future business decisions

  -helps understand the performance of the business over time
• Financial Statements


  public and private limited companies - producing financial statements is a legal requirement

  • failure to do so results in fines and sanctions
• Financial Statements


  Two types:

  • income statement
  • statement of financial position
• Financial Statements


  Statements give:

  • a range of business stakeholders an understanding of the financial performance
  • gross and net profit margins
• Financial Statements


  Advantages:

  • allows a business to spot trends
  • allows comparison with other businesses
  • give clear financial overview of the business
• Financial Statements


  Disadvantages:

  • can be time consuming to prepare
  • make it difficult to hide financial information from competitors or potential investors
• Financial Statements


  Income statement - demonstrates financial performance of a business based on its income and how this has changed over a period of time

  • allows shareholders and owners to monitor business performance in line with business objectives and rest of the industry
• Financial Statements


  Income Statement information:

  • revenue
  • cost of sales
  • gross profit
  • net profit
  • other expenses
• Financial Statements


  revenue - money received from sales of goods and services in a business

  cost of sales - variable costs incurred as a direct result of making a product or providing a service (raw material costs)

  expense - other business costs, wages, rent, bills and advertising
• Financial Statements


  gross profit - revenue minus cost of sales, doesn't take into account any other expenses involved, gross profit = revenue - cost of sales

  net profit - measures overall financial performance to see if they are successful in a given time period, net profit = gross profit - total expenses
• Statement of Financial Position


  often referred to as a 'balance sheet'

  • snapshot in time (only considers value at a particular point)
  • aim is to get assets and capital employed to match (balancing the sheet)
• Statement of Financial Position


  assets - things a business owns

  liabilities - things/money that a business owes
• Statement of Financial Position


  Assets:

  • current - short term, less than a year, e.g stock, raw materials and cash
  • fixed (non current) - long term, more than a year, e.g vehicles, equipment and buildings
• Statement of Financial Position


  Liabilities:

  • current - short term debts, paid back within a year, e.g overdrafts and trade credit
  • long term (non current) - money borrowed that is paid back in more than a year, e.g mortgages
• Statement of Financial Position


  net current assets = working capital

  • current assets - current liabilities
  • money available for day to day running and operation of the business (paying wages/purchasing stock)
• Statement of Financial Position


  Net assets -> what a business is worth

  • fixed assets + net current assets (working capital)
  • difference between total assets and total liabilities
• Statement of Financial Position


  Capital employed - adding equity and reserves, e.g shareholder funds, to long term liabilities

  • should match net assets figure
• Data interpretation


  comparisons over time:

  • revenue made each year
  • gross and net profits
  • expenses
  • liabilities
  • assets
• Data interpretation


  Shareholders:

  • interested in profit made
  • reduction of overall expenses
  • expectation for financial performance to improve each year
• Data interpretation


  Suppliers:

  • rely on payments from business
  • huge amounts of profit = possibly increase their prices
  • loss amounts of profit = question whether the business will remain loyal
• Data interpretation


  Employees:

  • expect to receive a pay increase
  • receive a share of business profits
  • become concerned about job security if its making a loss
• Data interpretation


  Gross Profit Margin: percentage of sales revenue that is left once the cost of sales has been paid - tells a business how much gross profit is made for every pound of sales revenue received

  • gross profit margin (%) = gross profit/sales revenue x 100
• Data interpretation


  Net Profit Margin: proportion of sales revenue that is left once all costs have been paid, tells a business how much net profit is made for every pound of sales revenue received

  • net profit margin (%) = net profit/sales revenue x 100
• Data interpretation


  Net profit margin uses:

  • comparison with gross profit margin - identify significance of fixed costs/overheads
  • comparison over time