3.7.2 Analysing the existing international position of a business to assess strengths and weaknesses: financial ratio analysis

Balance sheets

Essentially looks at how rich a business is. Adds up totals on last day of financial year, looks at what they owe + what they own. Show wealth/indebtedess of business - vital info for shareholders, managers, financiers + other stakeholders.

Shows where business obtained finances - liabilities. Lists assets prchased w/ funds. Helps bankers decide whether or not to:
 - invest in a business
 - lend it some money
 - buy the organisation

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Balance sheets

Essentially looks at how rich a business is. Adds up totals on last day of financial year, looks at what they owe + what they own. Show wealth/indebtedess of business - vital info for shareholders, managers, financiers + other stakeholders.

Shows where business obtained finances - liabilities. Lists assets prchased w/ funds. Helps bankers decide whether or not to:
 - invest in a business
 - lend it some money
 - buy the organisation

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Composition of balance sheet

'Snapshot in time', shows position of company at any given time. Shows what business owes + owns in 1 day - shows assets + liabilities.

Foundation of balance sheet - firm's capital. May have come from shareholders, bankers or from reinvested profit. 

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Balance sheet: type of asset

Non-current: long term assets eg:
 - land + buildings
 - plant/machinery/equipment
 - vehicles
 - patents/copyright

Current: short term assets eg:
 - inventories
 - receivables
 - cash

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Capital on balance sheet

Companies 3 main sources LT capital: shareholders (share capital), banks (loan capital) + reinvested profits (reserves). Loan capital - interest charges that must be repaid, as must loan itself. Share capital + reserves both owed to shareholders, but don't have to be repaid - treated separately. Share capital + reserves known as total equity.

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Assessing financial performance - balance sheet

Financial performance - level of success/failure achieved by business. Typically measured by profit. Baance sheet gives vital clue to company's real performance over time through reserves, which shows accumulated, retain profit since business started trading. 

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Income statements

Records all business's revenues + costs w/in given trading period. Income statements constitute vital piece of evidence for those w/ interests in company. For many stakeholders, profit is major criterion by which to judge success of business:
 - shareholders obvious example of those assessing profitability
 - gov agencies eg tax authorities require data on profits/losses to be able to calculate liability of business to corporation tax
 - suppliers to business also need to know financial position of companies they trade w/ in order to establish reliability, stability + creditworthness
 - potential shareholders + bankers will also want to assess financial position of company before committing funds to business

Making profit is one of signif objs for organisations - motive that encourages many people to etablish own business/expand an existing one. W/o potential for making profit, why should companies commit time + resources to make risky venture? Income statement is important to charity as it is to company.

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Uses of income statements

Data can be used:
 - to measure success of business compared w/ previous years or other business comapred w/ previous years or other businesses
 - to assess actual performance compard w/ expectations
 - to help obtain loans from banks/other lending institutions (creditors want proof business capable of repaying any loans)
 - to enable owners + managers to plan ahead; eg for future investment in company

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How an income statement shows profit/loss

4 main stages of income statement:
 - First, 'gross profit' calculated - diff b/ween income + cost of goods sold
 - Second 'operating profit' calculated - deducting main types of overhead eg distribution costs + admin costs
 - Profit before taxation calculated - inclusion of interest received by business + interest paid by it. Normally shown togetther as 'financing costs'.
 - Final stage, calculate profit after tax - detucying amount of tax payable for year + shows net amount earned by shareholders.

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Analysing existing internal position of business

Beginning of 2015 no UK business had better press than John Lewis Partnership - become cross b/ween national treasure + business icon for m/c. Accounts showed b/ween 2008 + 2014 sales risen by half, yet profits stubbornly static. Balance sheet deteriorating - allowed them to build up analysis through strengths + weaknesses:
 Strengths
  - revenue by half bween 2008 + 2014; growth seems to have been obj + was achieved
  - market share of Waitrose + John Lewis risen massively
 Weaknesses
  - b/ween 2008 + 2014, decline in John lewis contribution to GB corporation (profit) tax. Partly b/c of policy of cutting corporation tax for big companies, but also b/c of falling profitability of business
  - deterioration in ST financial position of business, w/ current liabilities rising faster than current assets needed to pay them

Analysis shows published account can help analyse internal position of business - for potential benefit of customers, staff + suppliers.

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