1. 2.3 How do Businesses Survive?
BUSINESS MANAGEMENT
2.3 How do Businesses Survive?
2.3 How do businesses survive?

2. In this unit you will learn …
About the need to plan
What is a saleable product
What are costs
What is break-even analysis
Why is Cash Flow important
What are Final Accounts
What are ratios and percentages used for
Why is Market Research important
How to make comparisons between years or businesses
2.3 How do businesses survive?

3. Standard Grade Business Management
The Need to Plan!
All organisations should have goals or objectives so that they know what they are aiming for. Suggest objectives for the following organisations …
Oban Saints
Oban Saints
Oban Saints
Oban Saints
Oban High School
Oban High School
Oban High School
Oban High School
Oxfam
Oxfam
Tesco
Tesco
Tesco
2.3 How do businesses survive?
2.3 How do Businesses Survive

4. 2.3 How do businesses survive?
The Need to Plan!
Business organisations must prepare a business plan/forward plan (set objectives) to ensure that they:
Meet customer needs and wants
Manage costs effectively
Stay competitive
2.3 How do businesses survive?

5. Types of Decisions to be Made
product or service? how many to make?
how many workers? when will I make a profit?
what price? new product? size of product?
how much will it cost?     what materials?
2.3 How do businesses survive?

6. Saleable Products/Services
Saleable products must…
be of suitable quality
in the quantities required
at a suitable price
available to the correct consumer market
which consumers want to buy
2.3 How do businesses survive?

7. 2.3 How do businesses survive?
Covering Costs!
ALL types of organisation, whether they exist to make a profit or not, must consider COSTS! What costs would be involved in running these organisations?
Oban Saints
Tesco
Oban High School
Oxfam
2.3 How do businesses survive?

8. Example of Costs Fraser decides to make a jar of jam
Q: What is the lowest price Fraser could charge in order to cover his costs?
A: £0.85
Q: If Fraser charged £1.00 for the jar of jam, how much profit would he make?
Answer:
£1.00
-£0.85
£0.15
Fruit £0.50
Sugar £0.20
Mum’s gas £0.10
Jar and cover £0.05
2.3 How do businesses survive?

9. 2.3 How do businesses survive?
Another Example
Fraser goes into mass production of jam
Sales Income £15,000
Fruit £7,000
Sugar £3,000
Jars and covers £300
Light and heat £500
Staff wages £2000
Rent of factory £1,000
Insurance £200
Fraser will prepare a profit and loss account to calculate his profit from making jam
2.3 How do businesses survive?

10. From the Profit and Loss Account, answer the following questions …
What are the total costs?
What is Fraser’s income?
Jam sells at £1 per jar. How many jars were sold?
How could Fraser increase his profit?
2.3 How do businesses survive?

11. 2.3 How do businesses survive?
What are the total costs?
What is Fraser’s income? £15,000
Jam sells at £1 per jar. How many jars were sold?
£15,000/£1 =
15,000 jars
How could Fraser increase his profit? Increase price of jam eg to £1.50 Reduce costs
2.3 How do businesses survive?

12. Important points about Costs!
Profit is the amount made after costs are paid.
Businesses must cover costs or they will make a loss
Some new businesses will aim to only cover costs or break-even (ie not make a profit or a loss) in the first few years - to get established
Forecasting income and costs allows businesses to make decisions and plans eg – get a loan or overdraft in a month where income is low.
2.3 How do businesses survive?

13. 2.3 How do businesses survive?
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2.3 How do businesses survive?

14. What is a Budget?
A plan that a business prepares for the year ahead. It is based on the objectives of the business and provided targets for the employees to achieve.

15. Why Prepare a Budget?
Greater control over the future of the business – gives targets and reduces RISKS
Weaknesses or difficulties can be anticipated before they happen
Less uncertainty and fear about future
Decisions can be made eg to purchase asset?

16. What does a Cash Budget look like?
CASH BUDGET FOR FIONA’S FLOWER SHOP
January
February
March
Can you see any possible problems?
Opening Bal
1900
5500
-1900
Receipts
Sales
12500
14000
15200
14400
19500
13300
Payments
Purchases
5500
8000
9200
Rent
2000
2000
2000
Heat and Light
1100
1100
1100
Wages
300
300
300
Van
10000
8900
21400
12600
Closing Balance
5500
-1900
700

17. What could Fiona do about the February cash flow problem?
Arrange a bank loan
Arrange an overdraft - when there is a negative balance in the bank account.
Buy the van on Hire Purchase
Try to increase sales
Find a cheaper supplier

18. Using a Spreadsheet for Budgets
Can perform calculations (formula)
Can run scenarios (what ifs?)
Can display results on charts

19. Importance of Planning and Control
Businesses must cover costs or they will make a loss
Some new businesses will aim to only cover costs or break-even (ie not make a loss) in the first few years - to get established
Profit is the amount made after costs are paid.
Forecasting income and costs allows businesses to make decisions and plans eg – get a loan or overdraft in a month where income is low.

20. Types of Costs
Fixed Costs are those costs which stay the same irrespective of how much you sell or produce (eg rent for premises, insurance premiums)
Variable Costs are those costs which increase directly as sales or production increases (eg power to machines, some wages [where workers are paid according to how much they produce])

21. Value of Sales and Costs
Break-even Chart
Costs &
Revenues
(£)
Sales
Revenue
Break-even point
Total Costs
Value of Sales and Costs
Fixed Costs
Quantity
No of Items Sold
G/C

22. Break-even point Costs & Revenues (£) Area of Profit Area of loss
BREAK-EVEN CHART
Costs &
Revenues
(£)
Break-even point
Area of Profit
Area of loss
Quantity
For an explanation of the shaded areas see next slide
G/C

23. The green shaded area (to the left of BEP) shows
the losses made at the appropriate levels of sales
since Total Cost is greater the Sales Revenue.
The blue shaded area (to the right of BEP) shows
the profits made at the appropriate levels of sales
since Sales Revenue is greater the Total Cost.
Therefore the BE chart allows you to calculate whether a profit or loss will be made at any level of sales.
G/C

24. Fixed or Variable? Rent Chocolate Staff wages Packaging Icing sugar
Coffee
Electricity
Ribbons
Flour
Advertising material
Insurance
Lolly sticks
Ice cream
Tea
Milk
Website designer

25. TRADING AND PROFIT & LOSS ACCOUNT
TRADING ACCOUNT
Gross Profit =
difference between money from selling goods and cost of buying or making these goods
PROFIT & LOSS ACC
Net Profit =
gross profit less expenses (overheads), eg wages, rent, lighting C

26. Trading and Profit & Loss Account
FRASER’S TRADING, PROFIT AND LOSS ACCOUNT
TRADING ACCOUNT – everything related to sale of goods and services
Sales
10000
Less Cost of Sales
Opening Stock
1000
Add Purchases
4200
5200
Less Closing Stock
1200
Cost of Sales
4000
GROSS PROFIT
6000
PROFIT AND LOSS ACCOUNT – for all expenses other than goods and services
Less Expenses
Light and Heat
300
Wages
600
Insurance 50
Rent 50
1000
NET PROFIT
5000 C

27. Shows the VALUE of the business on a particular date
BALANCE SHEET
Shows the VALUE of the business on a particular date
LIABILITIES and CAPITAL
ASSETS = C

28. FIXED ASSETS – last longer than a year
CURRENT ASSETS – last less than a year
CURRENT LIABILITIES – to be repaid in less than a year
CAPITAL – the owner’s share of the business
LONG TERM LIABILITY – repaid over more than a year

29. What are ratios? Ratios are calculated from final accounts
Trading, profit and loss account
Balance sheet
Comparison between years
Comparison between organisations
How well has the company done
Has the business improved or not?

30. Trading, Profit and Loss Account Ratios
Gross Profit % Ratio
Gross Profit
Sales
Yr 1 = 60%
Yr 2 = 45%
A higher percentage is GOOD!
A lower percentage is BAD!
X 100
Calculating this ratio helps to check:
the price paid for raw materials
wastage or damage to stock

31. Trading, Profit and Loss Account Ratios
Net Profit % Ratio
Net Profit
Sales
Yr 1 = 28%
Yr 2 = 36%
A higher percentage is GOOD!
A lower percentage is BAD!
X 100
The Net Profit percentage helps to monitor the amount a business spends on expenses

32. Trading, Profit and Loss Account Ratios
Rate of Stock Turnover
Cost of Sales
Average Stock (Opening+Closing Stock/2)
It is important that a business does not buy too much stock.
A rate of 1.3 times means that stock has changed only once in a year! Rate of turnover depends on product.
A fishmonger will have a rate of 300 times a year!

33. Current Assets : Current Liabilities
Balance Sheet Ratios
Working Capital Ratio
Measures how easily short-terms debts can be paid off
Current Assets : Current Liabilities
2 : 1 Good
1 : 2 Bad
Liquidity indicates whether a business has sufficient cash assets to meet its debts. Any business with insufficient assets to cover its debts will fall into financial difficulty.

34. Balance Sheet Ratios Acid Test Ratio Stock is least liquid asset
Ratio should be greater than 1
Current Assets - Stock : Current Liabilities
1.2:1 Good
1:2 Bad
Liquidity indicates whether a business has sufficient cash assets to meet its debts. Any business with insufficient assets to cover its debts will fall into financial difficulty.

35. Balance Sheet Ratios Return on Capital Employed (ROCE) Net Profit
X 100
If the return is the same as or lower than that to be earned from a safe investment (eg saving in the Bank or Building Society) then the Sole Trader will have to decide whether it is worthwhile for him/her to continue in business.

36. Ratio Summary
Properly used, ratios can tell interested parties about 3 main areas of a business’s finances:
Profitability – Gross Profit %, Net Profit %, Return on Capital Employed
Liquidity – Working Capital Ratio, Acid Test
Efficiency – Rate of Stock Turnover

37. Market Research Reasons for Market Research
Find out what is happening in the market at the moment
Help predict the future – for product development
Find out why sales have fallen
Investigate if there is a market for a product/service C

38. Market Research Problems with Market Research
Sampling – may not reflect nations views
People’s behaviour not always predictable
Wording of the questions – leading?
Attitude and personality of the interviewers? C

39. Use of Ratios
Compare between 2 years – can see if company has improved, has new idea worked, etc.
Compare between companies - you can compare 2 similar companies to see if one is better managed, better resources, etc.
Compare against expected (forecast) performance C

40. SUMMARY OF RATIOS PROFITABILITY - return on capital employed
gross profit percentage
net profit percentage
LIQUIDITY - working capital ratio
acid test ratio
EFFICIENCY - rate of stock turnover C

41. On the sheet provided, calculate Fraser’s
Gross Profit percentage for years 1 and 2 and comment
Net Profit percentage for years 1 and 2 and comment
Rate of Stock Turnover for years 1 and 2 and comment

42. Comment:
Fraser’s Gross Profit percentage has decreased which means that he is less profitable in buying and selling. This could be because the cost of buying stock has increased. He may have to look for cheaper suppliers or increase the selling price of his goods.

43. Comment:
Fraser’s Net Profit percentage has decreased which means that his expenses are relatively more expensive this year. He should consider changing his electricity supplier as the cost of light and heat has doubled.

44. Comment
The average stock has remained the same, however the rate of turnover has increased which proves that Fraser has been selling stock efficiently – he is moving stock more often.

45. Comparing Businesses Rate of
Comment on Futura’s Gross Profit Percentage and Stock Turnover in comparison with the other 3 businesses.

46. BALANCE SHEET RATIOS Ratio Coy A Coy B Comment Working Capital Ratio
2:1
5:1
Business A has ideal ratio whereas B is probably keeping too much stock
Acid Test Ratio
1:1
0.5:1
Business A has ideal ratio whereas B could be in trouble if creditors demanded payment
Return on Capital Employed
15% 5%
A is getting a good return. B should consider if the effort of running the business is worth the effort. Possible to earn a similar rate of return by investing in a high interest account

47. You Need to Know… Why businesses plan What is a saleable product
What are costs
What is break-even analysis
Why is Cash Flow important
What are Final Accounts used for
Why do businesses calculate ratios and percentages
What role does Market Research play in planning
How to make comparisons between 2 years or 2 businesses