1. F INANCIAL S TRATEGIES AND ACCOUNTS U SING F INANCIAL D ATA TO M EASURE AND A SSESS 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 BUSS3.3 Using Financial Data

2. U SING F INANCIAL D ATA TO M EASURE AND A SSESS PERFORMANCE I N 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 BUSS3.3 Using Financial Data You will need access to the internet to watch this clip

3. U SING F INANCIAL 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 BUSS3.3 Using Financial Data

4. A NALYSING F INANCIAL 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. BUSS3.3 Using Financial Data This unit is an introduction to analysing financial data, it is then covered in more detail in the next unit.

5. I NCOME S TATEMENT – THE T ERMINOLOGY RevenueSelling price x quantity sold Cost of salesDirect costs relating to quantity sold Gross profitProfit after cost of sales has been deducted ExpensesOther costs incurred e.g. marketing Operating profitProfit after all other expenses have been deducted Finance incomeMoney from investments Finance costCosts incurred through debts Profit before taxProfit after adjustments for profits from joint ventures or investments TaxationTax deducted as a % of profit before tax Profit for the yearProfit after tax has been deducted

6. I NCOME S TATEMENT – THE CALCULATIONS £m Revenue35400 Cost of sales30100 Gross profit5300 Expenses 720 Operating profit4580 Finance income 300 Finance cost (260) Profit before tax4620 Taxation1109 Profit for the year3511 35400 – 30100 = 5300 5300 – 720 = 4580 4580 + 300 - 260= 4620 4620 – 1109 = 3511

7. I NCOME S TATEMENT – T HE LAYOUT £m Revenue35400 Cost of sales(30100) Gross profit5300 Expenses(720) Operating profit4580 Finance income300 Finance cost(260) Profit before tax4620 Taxation(1109) Profit for the year3511 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)

8. I NCOME S TATEMENT – F URTHER A NALYSIS 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 BUSS3.3 Using Financial Data 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?

9. B ALANCE S HEET – T HE TERMINOLOGY Assets Items of value owned by a business Non – current assets Likely to be kept by the business for more than one year Vehicles Premises Machinery Current assets Likely to be turned into cash within a year Inventories Accounts Receivable (Debtors) Cash and Cash Equivalents BUSS3.3 Using Financial Data

10. B ALANCE S HEET – T HE TERMINOLOGY Liabilities Money a business owes i.e. debts Non – current liabilities Debts that the business has more than one year to repay Bank loans Current liabilities Debts that the business may have to repay within one year Overdrafts Accounts Payable (Creditors) BUSS3.3 Using Financial Data

11. B ALANCE S HEET – T HE TERMINOLOGY Non-current assetsLong term or fixed assets owned The next 3 headings are all current assets InventoriesThe value of stock held ReceivablesCash owing from credit sales Cash & cash equivalentsCash in hand or in the bank Total current assetsThe current assets added together Current liabilitiesMoney owed to be repaid in the short term Net current liabilitiesTotal current assets – current liabilities Non-current liabilitiesLong term debts Net assetsThe net worth of the business’ assets and liabilities Share capitalMoney raised from the sale of shares Reserves & retained earningsCumulative profits kept in the business Total equityThe value of shareholders’ funds

12. B ALANCE S HEET – T HE CALCULATIONS £m Non-current assets19550 Inventories 2375 Receivables 1170 Cash & cash equivalents 2300 Total current assets 5845 Current liabilities8160 Net current liabilities(2315) Non-current liabilities6000 Net assets11235 Share capital6000 Reserves & retained earnings5235 Total equity11235 2375 + 1170 + 2300 = 5845 5845 – 8160 = (2315) 19550 + (2315) – 6000 = 11235 6000 + 5235 = 11235 Net Assets = Total Equity

13. B ALANCE S HEET – T HE L AYOUT £m Non-current assets19550 Inventories 2375 Receivables 1170 Cash & cash equivalents 2300 Total current assets 5845 Current liabilities(8160) Net current liabilities(2315) Non-current liabilities(6000) Net assets11235 Share capital6000 Reserves & retained earnings5235 Total equity11235 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

14. B ALANCE S HEET – F URTHER A NALYSIS 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 BUSS3.3 Using Financial Data

15. B ALANCE S HEET – F URTHER A NALYSIS 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 BUSS3.3 Using Financial Data

16. U SING F INANCIAL D ATA FOR C OMPARISONS 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 BUSS3.3 Using Financial Data 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.

17. A SSESSING S TRENGTHS AND W EAKNESSES 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 BUSS3.3 Using Financial Data

18. A CTIVITY – F INANCIAL A CCOUNTS T ERMINOLOGY 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. BUSS3.3 Using Financial Data