UNIT 2 BUSINESS PERFORMANCE

What is required? P4 – Explain the performance of a selected business as illustrated by the use of key financial ratios

M3 – Analyse the reasons for the performance of a selected business as illustrated by the use of key financial ratios

D2 – Evaluate the significance of selected ratios in identifying serious problems of business performance.

Ratios – An IntroductionThere are three types of ratios:

1. PROFITABILITY How effective a business is at generating profits

2. LIQUIDITY

Whether a business can pay its way – meet its short-term debt

3. EFFICIENCY

How well the business is managed

EFFICIENCY

What is it?

• Assesses how efficient a business is (how well it is controlling its business activities)

• All businesses want to be EFFICIENT

• Why?

EFFICIENCY RATIOS• Debtors Days

• Shows how long on average it takes for debtors to pay

• Formula

Debtors x 365 Sales

Green Planet

37808 X 365 151324

= 91.19 days

What does this mean?

Good?Bad?

How to improve?

EFFICIENCY RATIOS• Creditors Days

• Shows how long on average it takes a business to pay its creditors

• Formula

Creditors x 365 Purchases

Green Planet

11112 X 365 63374

= 64 days

What does this mean?

Good?Bad?

How to improve?

EFFICIENCY RATIOS• Stock Turnover

• Shows how many times on average stock turns (is sold)

• Formula

• Cost of sales Average Stock (Opening Stock + Closing Stock ÷ 2)

Green Planet

70735 (15361+8000÷2)=11681

= 6.06 times

What does this mean?

Good?Bad?

How to improve?

Task - EvergreenContinue with your presentation including notes1. Describe the performance of Evergreen using

EFFICIENCY ratiosa) Debtor Daysb) Creditor Daysc) Stock Turnover

2. SHOW THE FORMULA3. SHOW YOUR ANSWER4. Are the results good or bad?5. Why?6. Can you compare with industry average?7. Suggest ways in which any concerns could be

rectified/improved?