FINANCIAL STRATEGIES AND ACCOUNTS

USING FINANCIAL DATA TO MEASURE AND ASSESS PERFORMANCE

“Money speaks sense in a language all nations understand”

Aphra Baldwin

“Annual income twenty pounds, annual expenditure nineteen and six, result happiness.

Annual income twenty pounds, annual expenditure twenty pounds nought and six,

result misery.”

Charles Dickens

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USING FINANCIAL DATA TO MEASURE AND ASSESS PERFORMANCE

IN THIS TOPIC YOU WILL LEARN ABOUT:

Analysing balance sheets

Analysing income statements

Using financial data for comparisons, trend analysis and decision making

Assessing strengths and weaknesses of financial data in judging performance

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You will need access to the internet to watch this clip

USING FINANCIAL DATA

PLCs have a legal obligation to publish their annual accounts

The format is governed by International Financial Reporting Standards (IFRS)

This format has altered some of the terminology used by UK firms to comply with standard practices across the world

Financial data can be used to assess Performance and Potential

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ANALYSING FINANCIAL DATA

Income Statement(previously referred to as a Trading, profit and loss account)

A formal financial document that summarises a business’ trading activities and expenses to show whether the business has made a profit or a loss

Balance Sheet

A formal financial document that summarises the net worth of a business at a given point in time. It balances net assets with total equity.

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This unit is an introduction to analysing financial data, it is then covered in more detail in the next unit.

INCOME STATEMENT – THE TERMINOLOGY

Revenue Selling price x quantity soldCost of sales Direct costs relating to quantity soldGross profit Profit after cost of sales has been

deductedExpenses Other costs incurred e.g. marketingOperating profit Profit after all other expenses have

been deductedFinance income Money from investmentsFinance cost Costs incurred through debtsProfit before tax Profit after adjustments for profits

from joint ventures or investmentsTaxation Tax deducted as a % of profit before taxProfit for the year Profit after tax has been deducted

INCOME STATEMENT – THE CALCULATIONS

£mRevenue 35400Cost of sales 30100Gross profit 5300Expenses 720Operating profit 4580Finance income 300Finance cost (260)Profit before tax 4620Taxation 1109Profit for the year 3511

35400 – 30100 =

5300

5300 – 720 = 4580

4580 + 300 - 260= 4620

4620 – 1109 = 3511

INCOME STATEMENT – THE LAYOUT

£mRevenue 35400Cost of sales (30100)Gross profit 5300Expenses (720)Operating profit 4580Finance income 300Finance cost (260)Profit before tax 4620Taxation (1109)Profit for the year 3511

The accounts are presented in a single

column

Brackets are used to show that a figure

should be deducted

Brackets are also used to show a negative figure so if the business had made a loss of £2000 this would be shown as

(£2000)

INCOME STATEMENT – FURTHER ANALYSIS

Profit Utilisation How the profit after

tax is used % paid in dividends

to shareholders % reinvested

(retained) in the business

Profit Quality The sustainability of

the profit figure % from normal

trading activities % from non standard

trading activities Sale of an asset Financial income from

an investment

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Profit utilisation will depend upon both long term and

short term financial objectives

You will need access to the internet to watch this clip

What are the benefits of considering profit in the short, medium and long

term?

BALANCE SHEET – THE TERMINOLOGY

Assets Items of value owned by a business

Non – current assets Likely to be kept by the business for more than one

yearVehiclesPremisesMachinery

Current assets Likely to be turned into cash within a year

InventoriesAccounts Receivable (Debtors)Cash and Cash Equivalents

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BALANCE SHEET – THE TERMINOLOGY

Liabilities Money a business owes i.e. debts

Non – current liabilities Debts that the business has more than one

year to repayBank loans

Current liabilities Debts that the business may have to repay

within one yearOverdraftsAccounts Payable (Creditors)

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BALANCE SHEET – THE TERMINOLOGY

Non-current assets Long term or fixed assets ownedThe next 3 headings are all current

assetsInventories The value of stock heldReceivables Cash owing from credit salesCash & cash equivalents Cash in hand or in the bank Total current assets The current assets added togetherCurrent liabilities Money owed to be repaid in the short termNet current liabilities Total current assets – current

liabilitiesNon-current liabilities Long term debtsNet assets The net worth of the business’

assets and liabilities

Share capital Money raised from the sale of shares

Reserves & retained earnings Cumulative profits kept in the business

Total equity The value of shareholders’ funds

BALANCE SHEET – THE CALCULATIONS

£mNon-current assets 19550Inventories 2375Receivables 1170Cash & cash equivalents 2300Total current assets 5845Current liabilities 8160Net current liabilities (2315)Non-current liabilities 6000Net assets 11235Share capital 6000Reserves & retained earnings 5235Total equity 11235

2375 + 1170 + 2300 =

5845

5845 – 8160 = (2315)

19550 + (2315) – 6000

= 11235

6000 + 5235 = 11235Net Assets = Total Equity

BALANCE SHEET – THE LAYOUT£m

Non-current assets 19550Inventories 2375Receivables 1170Cash & cash equivalents 2300Total current assets 5845Current liabilities (8160)Net current liabilities (2315)Non-current liabilities (6000)Net assets 11235Share capital 6000Reserves & retained earnings 5235Total equity 11235

The accounts are presented in a single column

Brackets are used to show that a figure

should be deducted

Brackets are used to show the number

is negative

BALANCE SHEET – FURTHER ANALYSIS

Depreciation Non – current assets are depreciated

Vehicles, machinery and fixtures and fittings This ensures their value as shown in the

balance sheet is a fair reflection of their actual value

The annual depreciation appears as an expense in the income statement

If a machine depreciates by £2500 per year this is the cost of using the machine in that financial year

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BALANCE SHEET – FURTHER ANALYSIS

Working Capital A measure of a firm’s liquidity / ability to

meet day to day expenses Working capital = Current assets – current

liabilities Stated on the balance sheet as net current

liabilities Working capital answers the basic question if

the firm had to pay off all its short term debts could it do so out of its short term cash resources i.e. Inventories, payables and cash

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USING FINANCIAL DATA FOR COMPARISONS

Inter-firm Between different firms Set ROCE targets

Intra-firm Within the same firm

By product By branch

Set ROCE targets Year on Year

Identify trends Decision Making

Financial data will help inform decision making and may even act as a constraint

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These comparisons will allow the firm to

benchmark externally against

competitors or internally .

Helps a business identify internal strengths and weaknesses.

Informs the setting of future objectives.

ASSESSING STRENGTHS AND WEAKNESSES OF FINANCIAL DATA

Strengths PLC accounts are audited and should therefore

be accurate Detailed quantitative data Ease of comparisons Facilitates ratio analysis for meaningful

interpretation Weaknesses

Is just a financial measure What about CSR?

Potential for some manipulation – Window dressing

Need to be considered in the context of corporate and functional objectives

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ACTIVITY – FINANCIAL ACCOUNTS TERMINOLOGY

You have been introduced to a lot of new terminology in this unit, it is important that you are confident with the language of accounts before moving onto the next unit.

1. Draw a mind map to summarise both an income statement and a balance sheet, make sure that all the correct terms are included, with explanations and examples where appropriate.

2. As a class individually draw 2 grids each with 9 squares in it - in one grid put in 9 words to do with an income statement in a random order and in the second grid 9 words related to a balance sheet. Nominate one person or the teacher to call out words or definitions. As they appear on your grid cross them off as if playing bingo.

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