ok, so what is a ratio? well a ratio is a way of using numbers to look at how well or how badly a...

Ok, so what is a Ratio?

Well a ratio is a way of using numbers to look at how well or how badly a business is doing.

Lets remember

ratios !

I remember this from my

business lesson - yes !!

What ratios have we

learnt ???

• Current Ratio

• Gross Profit Ratio

• Net profit Ratio

RATIO ANALYSIS

• Firstly, open up your case study to page 9

• Look closely at the balance sheet

• We can see that the accounts are for the whole of the virgin group

What are the balance sheet ratios What are the balance sheet ratios that we have learnt?that we have learnt?

What ratios do we need to know for the

exam?

•Current Ratio

•Acid Test Ratio

The Current Ratio I think I

remember this one!

CURRENT RATIO

• The Current Ratio will help you to understand how easily a business can meet all of their liabilities.

• Does the business have enough money available to allow them to pay for all of their debts if they was required to pay them straight away?

• It is giving us a measure of their LIQUIDITY.

There are 3 main reasons why a business needs adequate working capital.

It must:

• pay staff wages and salaries

• settle debts and therefore avoid legal action by creditors

• benefit from cash discounts offered in return for prompt payment

The Calculation:

Current Assets

Current Liabilities

• 2007:

14531 = 0.24

61273

• 2006:

53632 = 0.54

99745

Is it any good?• Well any answer between 1.5 and 2.0 is

excellent as this means that there is enough money available to pay all of their debts off at once and still continue in business

• If too high means that there may be too much money lying around

• If too low then they don’t have enough money to pay their debts

• What is happening with Virgin?

• Why is this a problem?

• The company will have to fund the deficit through perhaps an overdraft that will cost them as there are interest payments. Also the funds could be used more productively

• Need to get more liquid assets e.g collecting debts from debtors more quickly or holding less stock

The Acid Test Ratio

This is a new one for you!! It is very similar to the Current ratio but has stock taken out

The Acid Test Ratio

Current Assets – Stock Current Liabilities

The higher it is the better!

It can only come up if they give you a stock figure in the exam!

What does it show?• If the acid test ratio was 1.24 this would

mean that for every £1 a business owns it has £1.24 of assets that can be sold very quickly to pay it.

• Stock is not included because it may not be a finished good ready for sale.

Sources of Finance

5 MINUTE MINDMAP

What are the different sources of finance that we discussed as part of your

course work?

Note down as many as you can think of!

Quick Task

• Fill in the worksheet:

• Which sources of finance are suitable for the different business types?

Now lets think about Virgin …

• What sources of finance would apply to Virgin?

• Evaluate the most appropriate source of finance open to Virgin for expansion of the business.(8 marks)

That’s all you need to know about finance!!!