BusinessStudiesOnline:Slide1

Profitability & Liquidity

Profitability & Liquidity
Thesehavealreadybeenidentifiedasimportanttoolsfor
monitoringbusinessperformance
Liquidityreferstosolvencyandtheabilityofabusiness
toconvertassetstocash
Financialaccountsareproducedinordertomeasurethe
performanceofabusiness
BusinessStudiesOnline:Slide2
What Are Accounts?
What Are Accounts?
MainFinancialDocuments
Accountsarethefinancialrecordsofabusiness
Theyareusuallyconsistof:
TheTrading,
Profit&Loss
Account
Thistellsushow
muchprofithas
beenmade.
T
h
eB
alance
S
h
eet
Thistellsushow

m
uchm
oneyisin
thebusinessand
w
hereithasbeen
spent.
M
easures
Profitability
M
easu
res
L
iq
u
id
ity
BusinessStudiesOnline:Slide3
Weknowthatbusinesses:
Receivemoneyfromsellinggoodsandservices
Theyalsohavetopaycostsinordertomakethegoodsor
providetheservices
Profitisthedifferencebetweenthetwoandcanbe
calculatedusingthefollowingformula:
Clearlyaprofitwillgiveapositiveanswer,whilsta
lossismadeiftheanswerisnegative
ThiscalculationismadebytheTrading,Profitand
LossAccount
Profitability: Calculating Profit and Loss
Profitability: Calculating Profit and Loss
Profit = Total Revenue Total Cost
BusinessStudiesOnline:Slide4
Total Revenue
Total Revenue
Therearetwotypesofrevenuethatabusinesscan
obtain:
Sototalrevenueiscalculatedbyaddingthetwoforms
ofincometogether
TotalRevenue
SalesRevenue
NonOperatingIncome
Thetotalamount
receivedfromselling
productsorservices
Revenuereceivedfrom
sourcesotherthansales
e.g.:
Rentfromproperty
Returnoninvestments
SalesRevenue=PricexQuantity
BusinessStudiesOnline:Slide5
Total Costs
Total Costs
Therearetwotypesofcoststhatabusinessmustpay:
Sototalcostiscalculatedbyaddingthetwotypesof
coststogether
TotalCosts
CostofSales Expenses
SometimescalledFIXED
COSTSorOVERHEADS,
thesearecoststhatmustbe
paidirrespectiveofsales
Examplesinclude:rent,
mortgagerepayments,salaries
Sometimescalled
VARIABLECOSTS,these
arecostsincurredby
producinggoodsorproviding
services
Examplesinclude:raw
materials,petrol,maintenance
BusinessStudiesOnline:Slide6
Start
Start
-
-
up Costs & Running Costs
up Costs & Running Costs
Anewbusinessalsoneedstoidentifythosecoststhat
areoneoffandthosethatitwillneedtopayregularly
Assuchitisalsopossibletodivideitscostsinto2
differenttypes:
Startupcosts
These are costs
which have to be
met before a
business
can start trading.
They will differ
depending on the
sort
of business that is
being set up
Runningcosts
Once set up, the
business will carry
on buying resources
to use to keep
producing. These
are the day-to-day
expenses that
result from trading
BusinessStudiesOnline:Slide7
Your Start
Your Start
-
-
up Costs & Running Costs
up Costs & Running Costs
Usethetablebelowtoidentifysomeofthestartup
costsandrunningcostthatyouwillneedtoconsiderin
yourbusinessplan:
RUNNINGCOSTS STARTUPCOSTS
BusinessStudiesOnline:Slide8
Liquidity
Liquidity
LiquidityismeasuredbycomparingtheASSETSofa
businesswithitsLIABILITIES:
TheseformpartoftheBalanceSheet
Assets
Areitemsowned
bythebusinessor
owedtothe
business
Assets
Areitemsowned
bythebusinessor
owedtothe
business
Liabilities
Areamountsowed
bythebusiness
thatmustbepaid
Liabilities
Areamountsowed
bythebusiness
thatmustbepaid
BusinessStudiesOnline:Slide9
Explaining Assets
Explaining Assets
lastalongtime,eg
buildings,vehicles,
computers
costalotofmoney
couldbesoldto
increasecapital
(i.e.moneyownedby
thebusiness)
Fixed assets
Current assets
Itemsusedandreplaced
regularly,e.g.raw
materialsorstock
Customerswhoowe
money(calleddebtors)
forgoodstheyhave
bought
Moneyinthecurrent
bankaccount
BusinessStudiesOnline:Slide10
Explaining Liabilities
Explaining Liabilities
amountsowedwhichare
duetoberepaidwithina
year
Moneythebusiness
owestosuppliers(called
creditors)forgoods
purchasedoncredit
Shorttermloans
amountsowedwhichare
duetoberepaidinmore
thanayearstime
Mortgagesnormally
payableovera25year
period
Longtermbankloans
Current Liabilities
Long Term Liabilities