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 Introduction

1. PROFITABILITY How effective a business is at generating profits

2. LIQUIDITY

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

LIQUIDITY

What is it?

• Assesses whether a business can pay its way

• Pay its bills

• Meet its short-term debt

• All businesses want to be LIQUID (able to pay their short term debt)

• Why?

Why is it necessary for a business to be liquid?

• A business needs to be liquid to ensure its long-term survival. A business will struggle to survive with poor cash flow.

• A business needs a positive cash flow in order to meet its everyday commitments, i.e. in order to pay wages and creditors.

• If a business is not liquid then they may face LIQUIDATION and then BANKRUPTCY

LIQUIDITY RATIOS• Current Ratio

• Shows every £1 of current assets available to meet the current liabilities

• Formula

Current AssetsCurrent Liabilities

Green Planet

5330716112

= 3.31 : 1

Good?Bad?

How to improve?

LIQUIDITY RATIOS• Acid Test Ratio

• Shows every £1 of current assets available to meet the current liabilities (not including stock)

• Formula

Current Assets - stockCurrent Liabilities

Green Planet

(53307-8000) = 4530716112

= 2.81 :1

Good?Bad?

How to improve?

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

LIQUIDITY ratiosa) Current Ratiob) Acid Test Ratio

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?