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BusinessStudiesOnline:Slide1
Profitability & Liquidity Profitability &
LiquidityThesehavealreadybeenidentifiedasimportanttoolsformonitoringbusinessperformanceLiquidityreferstosolvencyandtheabilityofabusinesstoconvertassetstocashFinancialaccountsareproducedinordertomeasuretheperformanceofabusiness
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BusinessStudiesOnline:Slide2
What Are Accounts? What Are Accounts?
MainFinancialDocuments
AccountsarethefinancialrecordsofabusinessTheyareusuallyconsistof:
TheTrading,Profit&Loss
AccountThistellsushowmuchprofithasbeenmade.
TheBalanceSheet
Thistellsushowmuchmoneyisinthebusinessandwhereithasbeenspent.
MeasuresProfitability
MeasuresLiquidity
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BusinessStudiesOnline:Slide3
Weknowthatbusinesses:ReceivemoneyfromsellinggoodsandservicesTheyalsohavetopaycostsinordertomakethegoodsorprovidetheservices
Profitisthedifferencebetweenthetwoandcanbecalculatedusingthefollowingformula:
Clearlyaprofitwillgiveapositiveanswer,whilstalossismadeiftheanswerisnegativeThiscalculationismadebytheTrading,ProfitandLossAccount
Profitability: Calculating Profit and Loss Profitability:
Calculating Profit and Loss
Profit = Total Revenue Total Cost
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BusinessStudiesOnline:Slide4
Total Revenue Total
RevenueTherearetwotypesofrevenuethatabusinesscanobtain:
Sototalrevenueiscalculatedbyaddingthetwoformsofincometogether
TotalRevenue
SalesRevenue NonOperatingIncome
Thetotalamountreceivedfromsellingproductsorservices
Revenuereceivedfromsourcesotherthansalese.g.:
RentfrompropertyReturnoninvestments
SalesRevenue=PricexQuantity
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BusinessStudiesOnline:Slide5
Total Costs Total
CostsTherearetwotypesofcoststhatabusinessmustpay:
Sototalcostiscalculatedbyaddingthetwotypesofcoststogether
TotalCosts
CostofSales Expenses
SometimescalledFIXEDCOSTSorOVERHEADS,thesearecoststhatmustbepaidirrespectiveofsales
Examplesinclude:rent,mortgagerepayments,salaries
SometimescalledVARIABLECOSTS,thesearecostsincurredbyproducinggoodsorprovidingservices
Examplesinclude:rawmaterials,petrol,maintenance
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BusinessStudiesOnline:Slide6
Start Start- -up Costs & Running Costs up Costs &
Running Costs
AnewbusinessalsoneedstoidentifythosecoststhatareoneoffandthosethatitwillneedtopayregularlyAssuchitisalsopossibletodivideitscostsinto2differenttypes:
Startupcosts
These are costs which have to be
met before a business
can start trading. They will differ depending on the
sort of business that is
being set up
Runningcosts
Once set up, the business will carry
on buying resources to use to keep
producing. These are the day-to-day
expenses that result from trading
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BusinessStudiesOnline:Slide7
Your Start Your Start- -up Costs & Running Costs up Costs
& Running Costs
Usethetablebelowtoidentifysomeofthestartupcostsandrunningcostthatyouwillneedtoconsiderinyourbusinessplan:
RUNNINGCOSTSSTARTUPCOSTS
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BusinessStudiesOnline:Slide8
Liquidity Liquidity
LiquidityismeasuredbycomparingtheASSETSofabusinesswithitsLIABILITIES:
TheseformpartoftheBalanceSheet
Assets
Areitemsownedbythebusinessor
owedtothebusiness
Assets
Areitemsownedbythebusinessor
owedtothebusiness
Liabilities
Areamountsowedbythebusinessthatmustbepaid
Liabilities
Areamountsowedbythebusinessthatmustbepaid
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BusinessStudiesOnline:Slide9
Explaining Assets Explaining Assets
lastalongtime,egbuildings,vehicles,computers
costalotofmoney
couldbesoldtoincreasecapital(i.e.moneyownedbythebusiness)
Fixed assets Current
assetsItemsusedandreplacedregularly,e.g.rawmaterialsorstock
Customerswhoowemoney(calleddebtors)forgoodstheyhavebought
Moneyinthecurrentbankaccount
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BusinessStudiesOnline:Slide10
Explaining Liabilities Explaining Liabilities
amountsowedwhichareduetoberepaidwithinayear
Moneythebusinessowestosuppliers(calledcreditors)forgoodspurchasedoncredit
Shorttermloans
amountsowedwhichareduetoberepaidinmorethanayearstime
Mortgagesnormallypayableovera25yearperiod
Longtermbankloans
Current Liabilities Long Term Liabilities
