2.3 how do businesses survive?1 business management 2.3 how do businesses survive?
TRANSCRIPT
2.3 How do businesses survive? 1
BUSINESS MANAGEMENT
2.3 How do Businesses Survive?
2.3 How do businesses survive? 2
In this unit you will learn …• About the need to plan• What is a saleable product• What are costs• What is break-even analysis• Why is Cash Flow important• What are Final Accounts• What are ratios and percentages used for• Why is Market Research important• How to make comparisons between years
or businesses
2.3 How do businesses survive? 3
The Need to Plan!All organisations should have goals or objectives so that they know what they are aiming for. Suggest objectives for the following organisations …
Oban High SchoolOban Saints
OxfamTesco
Oban High SchoolOban Saints
Tesco
Oban High SchoolOban Saints
OxfamTesco
Oban High SchoolOban Saints
2.3 How do businesses survive? 4
The Need to Plan!
Business organisations must prepare a business plan/forward plan (set objectives) to ensure that they:
• Meet customer needs and wants• Manage costs effectively• Stay competitive
2.3 How do businesses survive? 5
Types of Decisions to be Made
product or service? how many to make?how many workers? when will I make a profit?
what price? new product? size of product? how much will it cost? what materials?
2.3 How do businesses survive? 6
Saleable Products/Services
Saleable products must…• be of suitable quality• in the quantities required• at a suitable price• available to the correct consumer
market• which consumers want to buy
2.3 How do businesses survive? 7
Covering Costs!
• ALL types of organisation, whether they exist to make a profit or not, must consider COSTS! What costs would be involved in running these organisations?
Oxfam
Tesco
Oban High School
Oban Saints
2.3 How do businesses survive? 8
Example of CostsFraser decides to make
a jar of jam
Fruit £0.50Sugar £0.20
Mum’s gas £0.10Jar and cover £0.05
Q: What is the lowest price Fraser could
charge in order to cover his costs?
A: £0.85
Q: If Fraser charged £1.00 for the jar of jam, how much profit would
he make?
Answer: £1.00-£0.85 £0.15
2.3 How do businesses survive? 9
Another Example• Fraser goes into mass production of jam
Sales Income £15,000 Fruit £7,000
Sugar £3,000Jars and covers £300
Light and heat £500Staff wages £2000
Rent of factory £1,000Insurance £200
Fraser will prepare a profit and loss
account to calculate his profit from making jam
2.3 How do businesses survive? 10
From the Profit and Loss Account, answer the following
questions …1. What are the total
costs?2. What is Fraser’s
income?3. Jam sells at £1 per
jar. How many jars were sold?
4. How could Fraser increase his profit?
2.3 How do businesses survive? 11
1. What are the total costs?
2. What is Fraser’s income?
£15,000
3. Jam sells at £1 per jar. How many jars were sold?
£15,000/£1 = 15,000 jars
4. How could Fraser increase his profit?
Increase price of jam eg to £1.50
Reduce costs
2.3 How do businesses survive? 12
Important points about Costs!
• Profit is the amount made after costs are paid.
• Businesses must cover costs or they will make a loss
• Some new businesses will aim to only cover costs or break-even (ie not make a profit or a loss) in the first few years - to get established
• Forecasting income and costs allows businesses to make decisions and plans eg – get a loan or overdraft in a month where income is low.
2.3 How do businesses survive? 13
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• Click for video• Click for video
What is a Budget?
A plan that a business prepares for the year ahead. It is based on the objectives of the business and provided targets for the employees to achieve.
Why Prepare a Budget?
• Greater control over the future of the business – gives targets and reduces RISKS
• Weaknesses or difficulties can be anticipated before they happen
• Less uncertainty and fear about future• Decisions can be made eg to purchase
asset?
What does a Cash Budget look like?
Can you see any possible problems?
700-19005500Closing Balance
12600214008900
10000Van
300300300Wages
110011001100Heat and Light
200020002000Rent
920080005500Purchases
Payments
133001950014400
152001400012500Sales
Receipts
-190055001900Opening Bal
MarchFebruaryJanuary
CASH BUDGET FOR FIONA’S FLOWER SHOP
What could Fiona do about the February cash flow problem?
• Arrange a bank loan • Arrange an overdraft - when there
is a negative balance in the bank account.
• Buy the van on Hire Purchase• Try to increase sales• Find a cheaper supplier
Using a Spreadsheet for Budgets
• Can perform calculations (formula)• Can run scenarios (what ifs?)• Can display results on charts
Importance of Planning and Control
• Businesses must cover costs or they will make a loss
• Some new businesses will aim to only cover costs or break-even (ie not make a loss) in the first few years - to get established
• Profit is the amount made after costs are paid.
• Forecasting income and costs allows businesses to make decisions and plans eg – get a loan or overdraft in a month where income is low.
Types of Costs
Fixed Costs are those costs which stay the same irrespective of how much you sell or produce (eg rent for premises, insurance premiums)
Variable Costs are those costs which increase directly as sales or production increases (eg power to machines, some wages [where workers are paid according to how much they produce])
Costs &Revenues (£)
Quantity
SalesRevenue
Fixed Costs
Total Costs
Break-even point
G/C
Value of Sales and
Costs
No of Items Sold
Costs &Revenues (£)
Quantity
Break-even point
For an explanation of the shaded areas see next slide
G/C
Area of loss
Area of Profit
BREAK-EVEN CHART
The green shaded area (to the left of BEP) shows the losses made at the appropriate levels of salessince Total Cost is greater the Sales Revenue.
The blue shaded area (to the right of BEP) shows the profits made at the appropriate levels of salessince Sales Revenue is greater the Total Cost.
Therefore the BE chart allows you to calculate whether a profit or loss will be made at any level of sales.
G/C
Fixed or Variable?
• Rent• Chocolate• Staff wages• Packaging• Icing sugar• Coffee• Electricity• Ribbons
• Flour• Advertising
material• Insurance• Lolly sticks• Ice cream• Tea • Milk• Website designer
TRADING AND PROFIT & LOSS ACCOUNT
TRADING ACCOUNT
Gross Profit =
difference between money from selling goods and cost of buying or making these goods
PROFIT & LOSS ACC
Net Profit =
gross profit less expenses (overheads), eg wages, rent, lighting
C
Trading and Profit & Loss Account
C
FRASER’S TRADING, PROFIT AND LOSS ACCOUNT
5000NET PROFIT
100050Rent
50Insurance600Wages
300Light and Heat
Less Expenses
6000GROSS PROFIT
4000Cost of Sales
1200Less Closing Stock
5200
4200Add Purchases
1000Opening Stock
Less Cost of Sales
10000Sales
££TRADING ACCOUNT –
everything related to sale of goods and
services
PROFIT AND LOSS
ACCOUNT – for all
expenses other than goods and services
BALANCE SHEETShows the VALUE of the business on a
particular date
C
ASSETS LIABILITIES and CAPITAL
=
FIXED ASSETS – last longer than a
year
CURRENT ASSETS – last less than a year
CURRENT LIABILITIES – to be repaid in less
than a year
CAPITAL – the owner’s share of
the business
LONG TERM LIABILITY –
repaid over more than a year
What are ratios?
• Ratios are calculated from final accounts– Trading, profit and loss account– Balance sheet
• Comparison between years• Comparison between organisations• How well has the company done• Has the business improved or not?
Trading, Profit and Loss Account Ratios
• Gross Profit % RatioGross Profit Sales
Yr 1 = 60%Yr 2 = 45%A higher percentage is GOOD!A lower percentage is BAD!
X 100Calculating this ratio helps to check:• the price paid for raw
materials • wastage or damage to stock
Trading, Profit and Loss Account Ratios
• Net Profit % Ratio
Net Profit Sales
Yr 1 = 28%Yr 2 = 36%
A higher percentage is GOOD!A lower percentage is BAD!
X 100The Net Profit percentage helps to monitor the amount a business spends on expenses
• Rate of Stock Turnover
Cost of SalesAverage Stock (Opening+Closing
Stock/2)It is important that a business does not buy too
much stock.A rate of 1.3 times means that stock has changed
only once in a year! Rate of turnover depends on product.
A fishmonger will have a rate of 300 times a year!
Trading, Profit and Loss Account Ratios
Balance Sheet Ratios
• Working Capital RatioMeasures how easily short-terms debts
can be paid off
Current Assets : Current Liabilities
2 : 1 Good1 : 2 Bad
Liquidity indicates whether a business has sufficient cash assets to meet its debts. Any business with insufficient assets to cover its debts will fall into financial difficulty.
Balance Sheet Ratios
• Acid Test Ratioo Stock is least liquid asseto Ratio should be greater than 1
Current Assets - Stock : Current Liabilities
1.2:1 Good1:2 Bad
Liquidity indicates whether a business has sufficient cash assets to meet its debts. Any business with insufficient assets to cover its debts will fall into financial difficulty.
Balance Sheet Ratios
• Return on Capital Employed (ROCE)
Net Profit Capital EmployedX 100
If the return is the same as or lower than that to be earned from a safe investment (eg saving in the Bank or Building Society) then the Sole Trader will have to decide whether it is worthwhile for him/her to continue in business.
Ratio Summary
Properly used, ratios can tell interested parties about 3 main areas of a business’s finances:
• Profitability – Gross Profit %, Net Profit %, Return on Capital Employed
• Liquidity – Working Capital Ratio, Acid Test
• Efficiency – Rate of Stock Turnover
Find out what is happening in the market at the moment
Help predict the future – for product development
Find out why sales have fallen
Investigate if there is a market for a product/service
Market Research
Reasons for Market Research
C
Sampling – may not reflect nations views
People’s behaviour not always predictable
Wording of the questions – leading?
Attitude and personality of the interviewers?
Market Research
Problems with Market Research
C
Use of Ratios
Compare between 2 years – can see if company has improved, has new idea worked, etc.Compare between companies - you can compare 2 similar companies to see if one is better managed, better resources, etc.Compare against expected (forecast) performance
C
SUMMARY OF RATIOS
PROFITABILITY - return on capital employedgross profit percentagenet profit percentage
LIQUIDITY - working capital ratio acid test ratio
EFFICIENCY - rate of stock turnover
C
On the sheet provided, calculate Fraser’s
Gross Profit percentage for years 1 and 2 and comment
Net Profit percentage for years 1 and 2 and comment
Rate of Stock Turnover for years 1 and 2 and comment
Comment:Fraser’s Gross Profit percentage has decreased
which means that he is less profitable in buying and selling. This could be because the cost of buying stock has increased. He may have to look for cheaper suppliers or increase the selling price of his goods.
Comment:Fraser’s Net Profit percentage has decreased which
means that his expenses are relatively more expensive this year. He should consider changing his electricity supplier as the cost of light and heat has doubled.
CommentThe average stock has remained the same, however
the rate of turnover has increased which proves that Fraser has been selling stock efficiently – he is moving stock more often.
Comparing Businesses
Comment on Futura’s Gross Profit Percentage and Stock Turnover in comparison with the other 3 businesses.
Rate of
BALANCE SHEET RATIOSRatio Coy
ACoy B
Comment
Working Capital Ratio
2:1 5:1 Business A has ideal ratio whereas B is probably keeping too much stock
Acid Test Ratio
1:1 0.5:1
Business A has ideal ratio whereas B could be in trouble if creditors demanded payment
Return on Capital Employed
15% 5% A is getting a good return. B should consider if the effort of running the business is worth the effort. Possible to earn a similar rate of return by investing in a high interest account
You Need to Know…
• Why businesses plan
• What is a saleable product
• What are costs• What is break-even
analysis• Why is Cash Flow
important• What are Final
Accounts used for
• Why do businesses calculate ratios and percentages
• What role does Market Research play in planning
• How to make comparisons between 2 years or 2 businesses