Presentation on theme: "2.3 How do Businesses Survive?"— Presentation transcript:
1 2.3 How do Businesses Survive? BUSINESS MANAGEMENT2.3 How do Businesses Survive?2.3 How do businesses survive?
2 In this unit you will learn … About the need to planWhat is a saleable productWhat are costsWhat is break-even analysisWhy is Cash Flow importantWhat are Final AccountsWhat are ratios and percentages used forWhy is Market Research importantHow to make comparisons between years or businesses2.3 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 SaintsOban SaintsOban SaintsOban SaintsOban High SchoolOban High SchoolOban High SchoolOban High SchoolOxfamOxfamTescoTescoTesco2.3 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 wantsManage costs effectivelyStay competitive2.3 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 qualityin the quantities requiredat a suitable priceavailable to the correct consumer marketwhich consumers want to buy2.3 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 SaintsTescoOban High SchoolOxfam2.3 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: £0.85Q: If Fraser charged £1.00 for the jar of jam, how much profit would he make?Answer:£1.00-£0.85£0.15Fruit £0.50Sugar £0.20Mum’s gas £0.10Jar and cover £0.052.3 How do businesses survive?
9 2.3 How do businesses survive? Another ExampleFraser goes into mass production of jamSales Income £15,000Fruit £7,000Sugar £3,000Jars and covers £300Light and heat £500Staff wages £2000Rent of factory £1,000Insurance £200Fraser will prepare a profit and loss account to calculate his profit from making jam2.3 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? £15,000Jam sells at £1 per jar. How many jars were sold?£15,000/£1 =15,000 jarsHow could Fraser increase his profit? Increase price of jam eg to £1.50 Reduce costs2.3 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 lossSome 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 establishedForecasting 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? Click for video2.3 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 RISKSWeaknesses or difficulties can be anticipated before they happenLess uncertainty and fear about futureDecisions can be made eg to purchase asset?
16 What does a Cash Budget look like? CASH BUDGET FOR FIONA’S FLOWER SHOPJanuaryFebruaryMarchCan you see any possible problems?Opening Bal19005500-1900ReceiptsSales125001400015200144001950013300PaymentsPurchases550080009200Rent200020002000Heat and Light110011001100Wages300300300Van1000089002140012600Closing Balance5500-1900700
17 What could Fiona do about the February cash flow problem? Arrange a bank loanArrange an overdraft - when there is a negative balance in the bank account.Buy the van on Hire PurchaseTry to increase salesFind 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 lossSome new businesses will aim to only cover costs or break-even (ie not make a loss) in the first few years - to get establishedProfit 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 CostsFixed 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 ChartCosts &Revenues(£)SalesRevenueBreak-even pointTotal CostsValue of Sales and CostsFixed CostsQuantityNo of Items SoldG/C
22 Break-even point Costs & Revenues (£) Area of Profit Area of loss BREAK-EVEN CHARTCosts &Revenues(£)Break-even pointArea of ProfitArea of lossQuantityFor an explanation of the shaded areas see next slideG/C
23 The green shaded area (to the left of BEP) shows the losses made at the appropriate levels of salessince Total Cost is greater the Sales Revenue.The blue shaded area (to the right of BEP) showsthe profits made at the appropriate levels of salessince 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
25 TRADING AND PROFIT & LOSS ACCOUNT TRADING ACCOUNTGross Profit =difference between money from selling goods and cost of buying or making these goodsPROFIT & LOSS ACCNet Profit =gross profit less expenses (overheads), eg wages, rent, lightingC
26 Trading and Profit & Loss Account FRASER’S TRADING, PROFIT AND LOSS ACCOUNTTRADING ACCOUNT – everything related to sale of goods and servicesSales10000Less Cost of SalesOpening Stock1000Add Purchases42005200Less Closing Stock1200Cost of Sales4000GROSS PROFIT6000PROFIT AND LOSS ACCOUNT – for all expenses other than goods and servicesLess ExpensesLight and Heat300Wages600Insurance50Rent501000NET PROFIT5000C
27 Shows the VALUE of the business on a particular date BALANCE SHEETShows the VALUE of the business on a particular dateLIABILITIES and CAPITALASSETS=C
28 FIXED ASSETS – last longer than a year CURRENT ASSETS – last less than a yearCURRENT LIABILITIES – to be repaid in less than a yearCAPITAL – the owner’s share of the businessLONG TERM LIABILITY – repaid over more than a year
29 What are ratios? Ratios are calculated from final accounts Trading, profit and loss accountBalance sheetComparison between yearsComparison between organisationsHow well has the company doneHas the business improved or not?
30 Trading, Profit and Loss Account Ratios Gross Profit % RatioGross ProfitSalesYr 1 = 60%Yr 2 = 45%A higher percentage is GOOD!A lower percentage is BAD!X 100Calculating this ratio helps to check:the price paid for raw materialswastage or damage to stock
31 Trading, Profit and Loss Account Ratios Net Profit % RatioNet ProfitSalesYr 1 = 28%Yr 2 = 36%A higher percentage is GOOD!A lower percentage is BAD!X 100The Net Profit percentage helps to monitor the amount a business spends on expenses
32 Trading, Profit and Loss Account Ratios Rate of Stock TurnoverCost of SalesAverage 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 RatiosWorking Capital RatioMeasures how easily short-terms debts can be paid offCurrent Assets : Current Liabilities2 : 1 Good1 : 2 BadLiquidity 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 1Current Assets - Stock : Current Liabilities1.2:1 Good1:2 BadLiquidity 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 100If 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 SummaryProperly used, ratios can tell interested parties about 3 main areas of a business’s finances:Profitability – Gross Profit %, Net Profit %, Return on Capital EmployedLiquidity – Working Capital Ratio, Acid TestEfficiency – Rate of Stock Turnover
37 Market Research Reasons for Market Research Find out what is happening in the market at the momentHelp predict the future – for product developmentFind out why sales have fallenInvestigate if there is a market for a product/serviceC
38 Market Research Problems with Market Research Sampling – may not reflect nations viewsPeople’s behaviour not always predictableWording of the questions – leading?Attitude and personality of the interviewers?C
39 Use of RatiosCompare 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) performanceC
40 SUMMARY OF RATIOS PROFITABILITY - return on capital employed gross profit percentagenet profit percentageLIQUIDITY - working capital ratioacid test ratioEFFICIENCY - rate of stock turnoverC
41 On the sheet provided, calculate Fraser’s Gross Profit percentage for years 1 and 2 and commentNet Profit percentage for years 1 and 2 and commentRate 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 CommentThe 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 2:15:1Business A has ideal ratio whereas B is probably keeping too much stockAcid Test Ratio1:10.5:1Business A has ideal ratio whereas B could be in trouble if creditors demanded paymentReturn on Capital Employed15%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 costsWhat is break-even analysisWhy is Cash Flow importantWhat are Final Accounts used forWhy do businesses calculate ratios and percentagesWhat role does Market Research play in planningHow to make comparisons between 2 years or 2 businesses