Title: Task 4
1Task 4
- P1, M1
- ( note D1 will be covered separately)
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4Range 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/
6What 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
7Net 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..
9Turnover
- 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 ?
10Return 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
11Look 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
12The 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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14Can the business pay its immediate bills ?
15Out of real liquid assets ? (ie Cash, in hand or
at the bank)
16Acid 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
17Acid 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)
18Output 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
19Efficiency 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
20Output
- 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 !
21More 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
22Targets
- 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
23Examples 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!
24Other Efficiency measures
- Examples
- Turnover per Employee
- Turnover per 100 labour cost
- Net Profit as a percentage of turnover
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26From www.investopaedia.com
27Gearing 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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29What 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
30Why 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
31Other ratios
- Current ratio
- CURRENT RATIO
- Current assets Current liabilities
- Sometimes also called Liquidity Ratio
- ACID TEST RATIO (Current assets stock)
Current liabilities
32Liquidity
- 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
33Solvency
- The degree to which the business can meets its
liabilities out of assets - Insolvency occurs when the business is unable to
meet its liabilities
34Targets 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
35Factors affecting busines
36Factors affecting business
- Political factors
- Economic factors
- Sociological factors
- Technological factors
- How might any of these affect the business ?
37SWOT 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)