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Task 4

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'Range of indicators used to monitor business performance' Translation: ... Or extend your overdraft. Ask for more time from creditors ... – PowerPoint PPT presentation

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Title: Task 4


1
Task 4
  • P1, M1
  • ( note D1 will be covered separately)

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4
Range of indicators used to monitor business
performance
  • Translation
  • How can business success be measured ?
  • Physical measures like
  • Customer numbers
  • Occupancy
  • Busy-ness/ Activity /
  • Yield ( crops tonnes/ha, livestock litres
    milk/cow)
  • Efficiency eg Feed Conversion Ratio
  • Financial Measures like
  • Income
  • Turnover
  • Gross Profit
  • Net Profit
  • Net Worth
  • Return on capital
  • The Acid Test
  • Debtor Days

5
  • Net profit per employee
  • Net profit per 100 labour cost
  • Net profit per team
  • Net profit per acre
  • Net profit per kennel/stable/glasshouse/

6
What to do
  • Select perhaps 6 measures of performance
  • Describe each one
  • Give a realistic example in a related business
  • State what the business can do about it
  • Thats it

7
Net Profit
  • Where is Net Profit calculated ?
  • What does the net profit tell you ?
  • If a company had a low net profit, is it
    automatically doing badly ?
  • Give an example.
  • What are the limitations of net profit as a
    measure of business success ?
  • What could a business DO about net profit ?

8
  • On its own, net profit only tells you half the
    story.
  • A small company making 20,000 is doing well
  • A large company making 20,000 is doing badly..

9
Turnover
  • Sale price x sale quantity
  • Useful to see the level of business activity
  • On its own, not much use in seeing if the
    business is doing well
  • Where is it calculated ?
  • What are its limitations ?

10
Return on Capital
  • Measures how hard your money is working for you.
  • If you invest 100,000
  • And you have a net profit of 20,000 a year
  • Your Return on Capital is
  • 20,000 x 100 20
  • 100,000

11
Look at these examples and comment on them, then
work out the Return on Capital
  • Invested 100,000
  • Net profit 30,000
  • 30
  • Invested 100,000
  • Net profit 15,000
  • 15
  • Invested 200,000
  • Net profit 20,000
  • 10
  • I

12
The Acid Test
  • A balance sheet calculation..
  • Can the business pay its immediate bills
  • Out of Cash
  • It is a strict measure of solvency
  • You would probably manage to get away with not
    passing the Acid Test
  • Because you might sell some stock
  • Or some of your debtors might pay their bills
  • Before you had to pay all your creditors

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Can the business pay its immediate bills ?
15
Out of real liquid assets ? (ie Cash, in hand or
at the bank)
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Acid Test Ratio
  • Current Assets Stock
  • Current Liabilities
  • If the answer to this calculation is 1.2 or more,
    you are safe and can pay your bills
  • If the answer is less than this, you need to
    figure out how to avoid an impending Cash Flow
    Crisis

17
Acid Test failure ? What to do
  • Get the bank to extend a loan
  • Or extend your overdraft
  • Ask for more time from creditors
  • Pay the urgent bills, ( and your staff) first
  • Sell stock at discount to raise cash ( can be
    cheaper than borrowing)

18
Output level
  • We often use these as a measure of success
  • Eg Yield per hectare ( plants, trees)
  • Occupancy level ( kennels, stables)
  • Production ( saleable items per day)
  • Customers per day
  • Trees felled per day etc etc

19
Efficiency levels
  • Customer Conversion
  • Invoices paid Customer Enquiries x100
  • Eg 4500 invoices /10,000 enquiries x 100
  • 45 of enquiries become
  • Miles per Gallon
  • Miles gallons
  • Ie Miles since last fill gallons to fill up

20
Output
  • Not always a good indicator of business success
    on its own
  • But a useful measure, and one capable of
    comparison with other businesses
  • BEWARE of using output as a business target..
  • You could chase this at the expense of a lot of
    investment !

21
More examples
  • Proportion of customers who you retain
  • Proportion of estimates which result in contracts
  • Hours charged out as a percentage of hours worked
  • Miles per job
  • Pence per mile
  • Miles per gallon

22
Targets
  • Targets are a great servant
  • But a very bad master
  • The danger of targets is that you focus on them
  • To the exclusion of other things
  • And you miss the big picture
  • And do stupid things in order to meet the target

23
Examples of bad targets
  • NHS waiting lists
  • We all want them to come down
  • But emphasising them makes unscrupulous managers
    delay registering patients for operations, in
    case they cause the waiting list to rise!

24
Other Efficiency measures
  • Examples
  • Turnover per Employee
  • Turnover per 100 labour cost
  • Net Profit as a percentage of turnover

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From www.investopaedia.com
27
Gearing ratio
  • Ratio of total liabilities to Net Worth
  • Total liabilities Net Worth
  • Sometimes termed Total Loaned Capital Total
    Capital
  • From the Balance Sheet
  • Indicates the degree of risk that the company
    represents for banks and creditors

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What has happened to the Gearing ratio ?
  • 121,800 32,600 roughly 41
  • 109,000 56,000 roughly 21
  • The company has greatly improved its gearing
    ratio, and is well placed to
  • Ask for more money from the bank

30
Why is it called Gearing Ratio
  • Like a car, the business will do better in the
    right gear
  • Borrowing too much against the value of the
    business will saddle the business with high
    repayments

31
Other ratios
  • Current ratio
  • CURRENT RATIO
  • Current assets Current liabilities
  • Sometimes also called Liquidity Ratio
  • ACID TEST RATIO (Current assets stock)
    Current liabilities

32
Liquidity
  • The degree to which the assets of the business
    are cash..
  • Farms are currently not very liquid, most of
    their assets are unavailable in the form of land
    and buildings, so they may have problems paying
    bills

33
Solvency
  • The degree to which the business can meets its
    liabilities out of assets
  • Insolvency occurs when the business is unable to
    meet its liabilities

34
Targets in business
  • What targets to set ?
  • How will setting targets help your business?
  • What will you do to help meet the targets ?
  • Which targets are most important ?
  • Why

35
Factors affecting busines
  • P
  • E
  • S
  • T
  • Analysis

36
Factors affecting business
  • Political factors
  • Economic factors
  • Sociological factors
  • Technological factors
  • How might any of these affect the business ?

37
SWOT analysis
  • Strengths of the business, competitive advantages
  • Weaknesses, aspects of the business which make it
    less competitive
  • Opportunities which might arise in future (
    potential future strengths)
  • Threats which might arise ( potential future
    weaknesses)
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