business notesxxxxxxxxxxxxxxxxxxxxxxx.pptx

business notes ib- incomplete

1. Unit 1 INTRODUCTION TO BUSINESS MANAGEMENT

2. 1.1. WHAT IS A BUSINESS Business: an organisation that provides goods/services, that satisfies its customers' needs/wants in a profitable/non-profitable way. THE ROLE OF A BUSINESS IN COMBINING RESOURCES The role of business is to combine human, physical and financial resources to create goods and services. Factors of production Process to add value Products Inputs Processes Outputs Labour (human resources) Capital (financial resources) Land (physical resources) Manufacturing of goods Provision of services Tangible (goods) Intangible (services)

3. BUSINESS FUNCTIONS All business functions are interdependent, as they depend on each other to achieve the business goal Human resources: Responsible for taking care of the people who work in the company Financial and accounts: Responsible for managing the organisation's money Operational management: Responsible for the process of converting raw materials into finished goods or providing services Marketing: Responsible for identifying and satisfying consumer wants and needs, to ensure the firm's products sell BUSINESS SECTORS Business sectors are classified according to the stage of production in which they are engaged Primary sector: any business involved in the extraction of raw materials. Secondary sector: any business involved in turning raw materials into goods Tertiary sector: any business involved in providing a service Quaternary sector: a subcategory of the tertiary, which involves any business related to knowledge-based activities and IT.

4. ENTREPRENEURSHIP Entrepreneurship: the pursuit of starting, managing and scaling a business Entrepreneur Someone who plans, organises and manages a business, by taking financial risks. Needs to have the ability and willingness to take potential risks They are usually visionaries, having a strong vision of the future OPPORTUNITIES FOR STARTING UP A BUSINESS Reason Explanation 1) Hobbie Turn your passion into a business by working with what you love 2) Security Accumulate personal wealth (financial security) to provide higher funds for (early) retirement 3) Autonomy Being self-employed means that there is an independent freedom of choice and flexibility in how things are done within the organisation

5. CHALLENGES FOR STARTING UP A BUSINESS Reason Explanation 1) Lack of finance Starting a business, borrowing money from external sources to buy the assets , affects the cash flow position of the firm 2) Unestablished customer base Difficult to attract customers as customer loyalty is built over o long period. 3) Recrutememt issues A new business may lack experience in hiring the right staff with the necessary skills 1.2. TYPES OF BUSINESS ENTITIES Private & Public sectors Private sector: owned and controlled by individuals or groups of individuals, with the main goal of making a profit Public sector: owned and controlled by the government, providing essential goods and services (like public transport, education, or healthcare) that would be underprovided by the private sector.

6. TYPES OF ORGANISATIONS + MAIN FEATURES Concept Definition Advantages Disadvantages Sole trader Has a single owner and runs the business alone , and it is required a varied skillset Easy to set up Owner has complete control Owner keeps all the profit Unlimited liability Higher workload and stress Owner is unable to specialise partnership Two or more people join together to form a business with their personal funds . Share responsibilities Partners may specialise in different areas More skills and knowledge are available Disagreements Unlimited liability Lack of continuity Privatly held company It cannot raise share capital from the general public with its stocks, as it is only available to employees or a select group of people Shareholders have limited liability Have continuity Better decision making. (fewer people involved) No member has full control of the company Difficult to sell shares More expensive to operate (fewer financial resources) Publicly held company It is owned by shareholders , and the shares can be bought and sold to the general public Shares can be sold to the public Are available more efficient sources of finance (bank loans). Loss of control Lack of privacy Communication issues due to size Useful Unlimited liability means that any owners/ shareholders share responsibility for debts in the case that a business fails

7. TYPES OF ORGANISATIONS + MAIN FEATURES Concept Definition Advantages Disadvantages Private sector company Profit-seeking organisation , while also improving one or more aspects of society Earn the revenues in a socially responsible way provide training and employment, which can lead to a better quality of life Achieving financial stability can be difficult may find it difficult to grow Public sector company Provide socially-focused services to make a profit and use it for the society More government financial support Complex and time- consuming decision-making Cooperatives Owned and run by members, with a common goal of benefiting the members by having a democratic culture Democratic Profits are shared equally between members Continuity Disagreements Decision-making can be time-consuming Difficult to attract investors Useful Triple bottom line: a framework that measures a business's success in three key areas: profit, people, and the planet Social enterprise: aims to both generate revenue and achieve social, environmental or cultural objectives to benefit society. Social enterprises focus on all three parts of the triple bottom line — they want to help people and the environment while also being financially sustainable (making a profit). For-profit social enterprises

8. TYPES OF ORGANISATIONS + MAIN FEATURES Concept Definition Advantages Disadvantages Non- governmental organisations ( NGO’s ) work at local, national, or international levels and are independent from the government. They are usually voluntary, and don’t try to make a profit, but focus on meeting needs They are financed by a combination of government funding and donations. Independent of government influence Has appositive impact on society Limited financial resources Difficult to survive Funding can be irregular, which makes financial planning difficult Non-profit social enterprises 1.3. BUSINESS OBJECTIVES Vision statement: outlines the long-term aspirations and future goals of the business Mission statement: outlines the overall purpose and reason for an organisation's existence by describing what the company does, who it serves, and how it provides value to its customers or stakeholders. Advantages Disadvantages Inspire and motivate employees A quick way to inform those outside the business of the central aim and vision They can be too vague and simple May be ignored or not taken seriously by employees Very time- consuming

9. AIMS, OBJECTIVES, STRATEGIES, TACTICS Aims: the overall long-term goals of the business, which are vague and often expressed in a mission statement There are three levels of objectives Strategic objectives: long-term goals set by senior managers to determine the actions necessary to achieve the set aims Tactical objectives: medium to short-term objectives set by medium managers to achieve the strategic objectives of an organisation Operational objectives: short-term, day-to-day objectives set by lower managers to achieve the tactical objectives of the organisation . THE NEED FOR CHANGING FACTORS Internal factors External factors Age of the business Type and size of the organisation Finance available. New technologies State of the economy Presence and power of pressure groups

10. COMMON BUSINESS OBJECTIVES Business objectives should be SMART S (specific): what exactly the business is measuring M (measurable): a quantifiable success measure A (achievable): set objectives that are possible to achieve by employees R (realistic): In normal circumstances, it is capable of being achieved T (time): a date or time by which the objective should be achieved COMMON STRATEGIC BUSINESS OBJECTIVES Strategic objective Explanation Profit maximisation Aims to make as much profit as possible, so to increase profit can either increase their sales revenue or decrease their costs. Growth Firms with a growth objective often focus on increasing their sales revenue or market share. They also maximise revenue to increase output and benefit from economies of scale. Protecting shareholders value Increasing shareholder value, which means making their shares more valuable and paying good dividends, helps to attract new investors and keep current shareholders satisfied. Ethical objectives These include a focus on climate action & addressing poverty or inequality. They still need profit to survive, but they are satisfied with less profit as long as they are meeting their social objective.

11. CORPORATE SOCIAL RESPONSIBILITY (CSR) Corporate Social Responsibility (CSR): businesses have a responsibility to consider and positively impact society beyond their economic interests. It involves considering the impact of business activities on various stakeholders, including employees, customers, communities, the environment, and society. ETHICS & CSR Ethics is about right and wrong behaviour , guiding a company’s values and choices, while CSR is the action that puts those ethical values into practice by acting responsibly toward society and the environment, going beyond the law's requirements Advantages Disadvantages Increases customers ’ loyalty : both existing and potential customers are likely to shop at businesses with social goals Improves corporate image and reputation : enhances the business image and reputation, and improves its attraction to many stakeholders Improve employee motivation and productivity Solve social issues Lower profits may reduce the overall level of profi ts Ethics and CSR are subjective : beliefs and principles vary depending on each individual and society

12. 1.4. STAKEHOLDERS INTEREST OF INTERNAL STAKEHOLDERS Stakeholders: a person or organisation that affects or is affected by a business. Internal stakeholder:  those who are directly involved in an organisation's operations and decisions External stakeholder: who are indirectly involved in an organisation's operations and decisions Market: those whom the organisation has a commercial relationship Non-market: money does not change hands Primary: has a direct relationship with the organisation Secondary: has an indirect relationship with Shareholders: return on investments, profit maximisation Managers: focus on getting the business further with their decisions Employees: fair treatment and high wages

13. INTEREST OF EXTERNAL STAKEHOLDERS Government: focus on creating jobs and incomes that boost the economy Suppliers: focus on maintaining a stable relationship Customers: focus on finding the best products that meet their needs Local community: focus on the business impact in the local area Financers: return on investment Pressure groups: how the business has an impact on their area of concern Competitor: observing their competitors to predict future activities and to react correctly CONFLICT BETWEEN STAKEHOLDERS' INTEREST It is difficult for a business to meet all its responsibilities to all stakeholders at the same time, so it might be necessary to compromise. It happens when it is unable to meet all of its stakeholders’ interests simultaneously, which may lead to disagreements due to different opinions

14. STAKEHOLDER ANALYSIS It ranks the interests of various stakeholders, and then the decision makers try to satisfy those stakeholders closest to the centre STAKEHOLDER MAPPING It identifies the appropriate strategies for managing relationships with stakeholders, considering the level of interest and power of each stakeholder Group A is the least important, with low interest and power. Group B has more interest but still low power, so they should be kept informed. Group C is important due to their power to influence others and must be kept satisfied. Group D is the most important, with high interest and power, and must be fully involved in major decisions.

15. 1.5. GROWTH AND EVOLUTION Economies of scale refer to a business that grows and expands, and gains a cost advantage by increasing its production. Diseconomies of scale occur when a business grows too large and becomes inefficient, increasing the cost per unit. Fixed costs: expenses that remain the same no matter how much activity a business is doing. Variable costs: expenses that change based on how much a business produces and sells. Useful formulas

16. INTERNAL & EXTERNAL ECONOMIES OF SCALE Internal economies of scale: happen as a result of the growth in the scale of production within the business Type Explanation Technical Occurs when high fixed costs (machinery) are spread over a huge scale of production Financial Bigger businesses are less risky than smaller businesses, so they often receive lower interest rates on loans Managerial Occurs when large businesses can employ specialist managers who are more efficient at certain tasks, and this efficiency lowers the average cost Marketing Occurs when they reuse marketing materials in different geographic regions which further lowers the average costs. External economies of scale: happen when there is an increase in the size of the industry in which the business operates Type Explanation Risk bearing Occurs when a firm can spread the risk of failure by increasing the number of its products Purchasing It occurs when large firms buy raw materials in greater volumes and receive a bulk purchase discount.

17. INTERNAL & EXTERNAL DISECONOMIES OF SCALE Type Explanation Management It occurs when managers work more in their self-interest than in the interest of the firm Geographical Occur when a rm has widespread bases of operations across multiple geographic locations  Cultural Occur when a rm expands into foreign markets in which workers have very dierent work or productivity norms Rent Occurs when the market rent increases due to too many businesses locating in a certain area THE DIFFERENCE BETWEEN INTERNAL & EXTERNAL GROWTH Internal/organic growth: a business grows using its own resources to increase the scale of its operations and sales revenue. External growth a business grows by collaborating with, buying up or merging with another firm. Main differences Internal growth External growth Slow and low risk E.g Product diversification opening a new store International expansion Fast, but risky E.g Vertical integration Joint venture Mergers and acquisitions

18. TYPES OF EXTERNAL GROWTH Concept Definition Advantages Disadvantages Mergers and acquisitions Merger : is the integration of two or more businesses to form a new single company Acquisition : a business takes control by buying a controlling interest in another company Economies of scale Fast way for a company to enter a new market It does not guarantees success Very expensive Integration (the coming together of two companies) that occurs in mergers and acquisitions: Horizontal integration- the most common type, firms operate in the same industry Vertical integration- businesses that are in different stages of production Forward vertical integration- a business integrates further forward to a later stage in the chain of production Backwards vertical integration- integration of a business towards an earlier stage of production 3. Conglomeration- integration of two businesses in unrelated lines of business. (diversification ) Advantages Disadvantages Gaining new knowledge and expertise Economies of scale Increased size & connections with new industries Diseconomies of scale Cultural clash Lack of expertise

19. TYPES OF EXTERNAL GROWTH Concept Definition Advantages Disadvantages Joint ventures Occurs when two or more businesses get together and form a new legal entity to pursue a common project Slip the costs , risks , and rewards Can growth occur without having to lose their organisational identity Might occur a disagreement between partners Diseconomies of scale Strategic alliances Each company works together , but no new legal entity is created Partners remain separate legal entities More fluid than a joint venture as membership can change without destroying the alliance Lack of stability A culture clash between the two businesses can affect the quality of the business Franchising A joint venture between a franchisor and franchisee Franchisor : sells the right to open stores and sell product using its brand’s name Franchisee : An individual buys the right to operate under another business name Rapid Expansion: Franchising allows for accelerated growth compared to traditional expansion methods Brand Recognition: With each new franchise unit, the brand's visibility and presence increase Loss of Control: Franchising involves granting a degree of control to franchisees and this may lead to variance in product standardisation and quality Reputation Risks: The actions of individual franchisees can impact the overall brand reputation

20. REASONS FOR BUSINESSES TO GROW Many organisations start small & will grow into large companies or even multi-national corporations later. Better and more sources of finance Higher status, brand recognition and sell to a wider market A greater chance of surviving in the industry REASONS FOR BUSINESSES TO REMAIN SMALL While many firms grow, others do not, or they intentionally choose to remain small. They offer a more personalised service and focus on building relationships with their customers Rapid growth can cause diseconomies of scale, which can be difficult to deal with, and so many owners choose to avoid these Most control over the organisation , and higher ability to respond quickly to changing customer needs/preferences

21. Nowadays, most nations are interdependent and related in a globalised world. Globalisation : refers to the way that trade and technology have made the world more interconnected and interdependent Multinational company: an organisation that operates in two or more countries besides its home country THE IMPACT OF MNCs ON THE HOST COUNTRIES Host country: any nation that allows an MNC to set up in its country Positive Negative MNCs can help boost the local economy, creating jobs and opportunities for local residents Transfer of knowledge: Domestic businesses may learn from the business culture or practices of MNCs. MNCs can bring new technologies and skills to local businesses, which will help to improve efficiency and productivity, helping domestic businesses MNCs may cause damage to the local environment during and after the production process If MNCs are able to produce at a lower cost and compete with local businesses, they can push domestic businesses out of the market, leaving customers with less choice and higher prices Labour exploitation: MNCs tend to establish production facilities in regions where labour costs are lower and pay relatively low wages 1.6. MULTINATIONAL COMPANIES (MNCs)

22. Unit2 INTRODUCTION TO BUSINESS

23. Unit 3 INTRODUCTION TO FINANCE

24. 3.1. INTRODUCTION When starting a new business, entrepreneurs need finance to cover initial setup costs . (e.g. renting, acquiring equipment, purchasing raw materials, hiring staff ). Finance: is the various available money that an organisation has to fund its business activities WHY BUSINESSES NEED FINANCE

25. TYPES OF CAPITAL Start-up capital: capital needed by an entrepreneur to set up a business Working capital: the capital required to pay for raw materials, day-to-day running costs and credit offered to customers. In accounting terms: working capital = current assets – current liabilities Capital expenditure: funds spent on non-current assets. These are assets which will be used many times and for more than one year Revenue expenditure: payments for the daily goods and services that a business uses in the short term 3.2. SOURCES OF FINANCE Businesses have different sources of finance, which are: Internal source of finance: refers to the finance that comes from within a business External source of finance: refers to the finance that comes from outside a business

26. SOURCES OF INTERNAL FINANCE Note: Internal sources of finance are often free and usually can be organised very quickly, but they are insufficient for large projects, and there is a significant opportunity cost involved Concept Definition Advantages Disadvantages Personal savings - s/t The source of finance comes from their personal savings , which is commonly used for sole traders and partnerships Provides much more control over the finances than the other options . Sole trader knows exactly how much money is available to run the business. Risky because the owner could be investing his life savings If savings are not sufficient, it could be difficult to maintain or start the business. Retained profit - l/t Is the finance left over after all costs and dividends are paid. Instead of giving it to shareholders, the business reinvests it to help the company grow It is a permanent source of finance as it does not have to be repaid. It does not involve interest charges Start-up businesses will not have any retained profit If retained profit is too low, it may not be sufficient for business growth or expansion. Sales of assets - l/t Selling business assets which are no longer required to generate a source of finance It does not involve a third party that may want to influence business decisions No interest or borrowing costs. Only useful for established businesses It can be time-consuming to find a buyer for the assets. Key s/t- short- term l/t- long-term

27. SOURCES OF EXTERNAL FINANCE Concept Definition Advantages Disadvantages Share capital ( equity capital) Finance raised from the sales of shares in a limited company , representing ownership in a business Permanent capital, so it does not need to be repaid No interest payments are made to shareholders, thus this reduces the expenses of the company Only public limited companies can trade their shares using the stock market Shareholders need to be paid dividends if the company earns a profit Loan capital ( debt capital) Borrowed funds from the financial lenders to purchase assets , which are repaid with interest over specific period Owners can raise money without selling shares, so they keep full control of the business. Loans can provide a large amount of capital quickly to fund growth or investment. Businesses must pay interest, which increases the cost of borrowing If the business fails to repay the loan, the lender can legally take its assets. overdrafts When a leading institution allows a firm to withdraw more finance than it has in its account Usually quick and simple to get. Useful for covering short-term cash flow problems or unexpected expenses. Interest on overdrafts is often higher than regular bank loans. Banks usually allow only small overdrafts, so it’s not suitable for big purchases

28. SOURCES OF EXTERNAL FINANCE Concept Definition Advantages Disadvantages Trade credit An agreement was made with suppliers to purchase and obtain goods and services , but to pay for these at a later date. 30-90 days No interest is charged during the credit period Businesses can keep cash longer by delaying payments. Late payments beyond the agreed time can damage trust with suppliers. Lose the chance to save money with early payment discounts Leasing It allows a firm to use an asset without having to purchase it with cash It is ideal if the asset is only needed for a short time. Businesses can spend cash on daily expenses instead of buying expensive assets. The business never owns the asset, even after paying for a long time. Leasing can cost more than buying the asset completely because payments add up over time. crowdfunding Involves raising small amounts of Money from a large number of people to fund a particular business project Since individuals only lend small amounts, the risk is shared. Investors don’t gain ownership or control of the business. Some crowdfunding campaigns are dishonest, so there is a risk of fraud. Investors can ask for more information, slowing down decisions and costing the business more money.

29. SOURCES OF EXTERNAL FINANCE Concept Definition Advantages Disadvantages Micro-finance providers Financial services are provided to individuals and small businesses who lack access to traditional banking Help people escape poverty by giving small loans to start or grow their own businesses Support small entrepreneurs, especially people in poor communities . Only offer small amounts of money , so they can’t solve big problems in society. Charge interest , which can be expensive for small business owners who struggle to repay. Business angels Wealthy individuals investing in high-risk businesses in Exchange for ownership Provide important money for new and small businesses to grow. Share their knowledge and experience to help the business succeed Business angels can lose their personal money if the business fails. Business angels usually want a share of the business and a say in how it’s run, which reduces the owner’s control.

30. MOST APPROPRIATE SOURCE OF FINANCE Businesses need to investigate and select a combination of sources of finance that are most suitable for their needs. FACTORS AFFECTING THE CHOICE OF FINANCE Timescale A long-term asset should be financed with long-term finance , a medium-term asset should be financed with medium-term finance and a short-term asset with short-term finance . Short-term finance This is money needed for the day-to-day running of a business and therefore provides its needed working capital. Medium-term finance This is money mostly used to purchase assets such as equipment or vehicles that have useful life spans for a specific period of time. Long-term finance This is funding obtained to purchase long-term fixed assets or other expansion requirements of a business.

31. Cost Businesses must carefully think about all the costs of getting finance . such as interest, admin fees, and share issue costs, plus the opportunity cost of choosing one option over another. Purpose Every source of finance has particular uses Amount required Businesses choose different types of finance depending on how much money they need Small amounts might use short-term options like overdrafts, while bigger amounts might need long-term loans or selling shares. Flexibility Businesses need to be able to change or add sources of finance easily, especially during busy times like seasonal demand. External environment Things outside the business can affect the purchasing decisions of both consumers and producers. like rising interest rates or inflation

32. Example: A company has the following capital structure: Debt: $600,000 Equity: $400,000 Interpretation: For every $1 of equity, the company has $1.50 of debt. This is considered high gearing (high financial risk) GEARING Gearing: the relationship between share capital and loan capital Above 50%: The company is highly geared, which means it has a lot of debt and faces higher financial risk. Between 25% and 50%: This is a normal and healthy level of debt for established companies. Below 25%: The company has low debt and is seen as low risk by investors and lenders. Investors and lenders may be reluctant to provide further funds for highly geared businesses due to the level of risk. Focus: shows the debt-to-equity ratio. Interpretation: How much debt the business has for every unit of equity. Use: Common in comparing risk between firms, especially to see how much the company relies on external borrowing versus shareholder funds.

33. Focus: This shows debt as a percentage of total capital employed (debt + equity). Interpretation: What is the proportion of the total long-term capital that is financed by debt. Use: Often used to see what percentage of the company’s capital structure is financed by debt. Example: A company has the following capital structure: Debt: $600,000 Equity: $400,000 Interpretation: 60% of the company’s total capital comes from debt. This also indicates a fairly high level of gearing, but expressed as a proportion of the whole. Advantages Disadvantages Helps banks and lenders decide if they should give loans- It shows how risky it is to lend money to the company. Shows financial risk- More debt = higher risk of insolvency or even bankruptcy. Helps companies manage their finances -Companies can use it to plan better, control debt, and monitor how much they depend on borrowing. It’s just one number- businesses shouldn’t look at it alone . It needs to be compared with the past performance of the same company and with other companies in the same industry to understand it properly.

34. 3.3. COSTS AND REVENUES Costs and revenues are very important factors that determine the success of any business. Cost refers to the total expenditure a business spends to keep running. Revenue is the money generated from the sale of goods and services. Profit is what is left after costs are taken away from revenue If profit is high , the business is doing well. If profit is low or negative , the business might be in trouble. TYPES OF COSTS Fixed costs: These are costs that do not change or vary with the amount of goods or services produced. Variable costs: These are costs that vary or change with the number of goods or services produced. Total costs: the sum of fixed + variable costs Direct costs: related to the production of a product and vary directly with output Indirect costs: can’t be clearly linked to the production or sale of a particular product

35. TOTAL REVENUE Total revenue: The total amount of money a firm receives from its sales (also known as sales revenue or turnover). R evenue streams: various sources from which a business earns money from the sale of goods or the provision of services Examples Donations- An important source of revenue for not-for-profit organisations Interest- Many businesses keep large amounts of money in bank accounts, and they earn interest on these deposits as an additional source of income Dividends- Businesses sometimes buy shares in other companies, and if those companies make a profit, they may receive dividends as a source of extra income. FORMULAS Total costs Average costs Profit Total revenue Price Average fixed cost

36. 3.4. FINAL ACCOUNTS It details the financial performance of a business over a specific period. The two main financial accounts are: The statement of profit or loss The statement of financial position THE STATEMENT OF PROFIT OR LOSS It shows the income and expenditure of a business over a period of time and calculates the amount of profit made. It is divided into three parts The trading account- where the cost of sales is deducted from sales revenue to calculate the gross profit The profit and loss account- deducts a series of expenses to determine the profit for the period The appropriation account- shows how profits are distributed for the time

37. THE STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) It shows the financial structure of a business at a specific time It identifies a business's assets and liabilities and specifies the capital (equity) used to fund the business Its net assets should be equal to the total equity Assets- resources of value that a business owns or that are owed to it Non-current assets: also called fixed assets, are long-term assets that are owned by a business for more than 12 months. Current assets: short-term assets that are converted into cash quickly. Intangible assets: Liabilities- a firm’s legal debts or what it owes to other firms, institutions, or individuals Non-current liabilities: long-term debts or borrowings payable after 12 months by the business. Current liabilities: short-term debts that are payable by the business within 12 months. Net assets Net assets= total assets - total liabilities

38. ADVANTAGES & DISADVANTAGES OF FINAL ACCOUNTS Concept Advantages Disadvantages Statement of profit or loss Helps understand if the company is profitable or making a loss. Useful for making decisions about the business, like cutting costs or investing more. Only covers a period of time, not a specific date. It doesn’t show what the business owns or owes. Doesn’t show cash flow — a company can show a profit but still run out of cash. Statement of financial position Provides a snapshot of liquidity- i t shows how easily the company can pay its short-term debts by comparing current assets and current liabilities. We can see if the company has enough money to keep running smoothly. Offers insight into a company’s financial health- gives a picture of how the company is doing at one specific moment. It shows everything the company owns, owes, and how much belongs to the owners. It doesn’t show growth over time- The balance sheet shows the company’s situation on just one day, not over a period. So it doesn’t tell you if the company is improving or getting worse over time. It’s best used with other financial statements- On its own, it doesn’t show how much profit the company made or how much cash it used. You need to look at it together with the income statement and cash flow statement to get the full picture.

39. THE PURPOSE OF ACCOUNTS TO DIFFERENT STAKEHOLDERS Stakeholder Impact Shareholders to see if the business is growing in value and efficiently using their investment to earn good returns. Managers to set targets and compare performance over time, which helps them create budgets for the future. Employees to understand the company’s financial health, which affects their job security and chances of pay rises. Customers to see if the business is financially stable and likely to keep producing products consistently, which helps them decide how much they can rely on the company. Suppliers to assess the business’s financial health and negotiate better payment based on its ability to pay debts. Government to ensure the business follows accounting laws, and to determine how much tax it should pay based on its profitability Competitors to compare their financial performance with competitors, checking if rivals are more profitable or struggling. Financers to decide if the business is safe to lend money to, such as considering factors like the company’s gearing Local community to understand if the business is good for their area, both economically and environmentally

40. DIFFERENT TYPES OF INTANGIBLE ASSETS Concept Definition Patents A right given to someone for an invention that is new and useful, allowing them to be the only one to make, use, or sell it for a set time. Goodwill The value of positive things a business has, like a strong brand and good reputation, usually appears when one company buys another, paying more than the company’s actual physical value. Copyright laws give creators the exclusive right to protect and control the use of their original artistic or literary works, usually lasting 50 to 100 years after their death, and others must get permission to use these works. Trademarks registered symbol, word, phrase, or design that identifies a product or business, and the owner can sue anyone who uses it without permission; trademarks usually last for 15 years and can be renewed or sold. DEPRECIATION It is the decrease in the value of a fixed asset over time. T here are two co mmo n methods of calculating depreciation Straight line depreciation U nits of production depreciation

41. STRAIGHT LINE METHOD Advantages Disadvantages Simple to calculate- It uses a basic formula and spreads the cost evenly over time, so it's easy to understand and apply. Predictable Expense- The same amount of depreciation is recorded each year, which makes it easier for a business to plan its budgets and forecast profits. Does not reflect actual usage - If an asset is heavily used in the early years and experiences less use later on, this method may not accurately represent its true value Market value ignored- Some assets, such as vehicles, depreciate rapidly in the early years and more slowly/not at all in later years Note: Straight-line depreciation is most suitable for assets that provide consistent utility or benefit over their useful life. e.g (should use this method) Buildings Office furniture (should not use this method) Machinery Vehicles Technology It reduces the value of an asset by the same value each year of its useful life. It requires the following elements in its calculation: the expected useful life of the asset the original cost of the asset the residual or scrap value of the asset

42. UNITS OF PRODUCTION METHODS Advantages Disadvantages Depreciation expenses match the actual usage of the asset, when an asset's wear and tear is directly related to its level of production Reflects the asset's actual value Calculation can be complex, especially when measuring actual usage is difficult or when production levels fluctuate Financial statements less predictable Inconsistent depreciation expenses each accounting period as it is directly tied to production levels Note: It depreciates an asset based on its usage or production output during a reporting period It requires the following elements: The cost basis of the asset. (The original value of the asset.) The salvage value of the asset. (The estimated value of the asset if it were to be sold at the end of its useful life.) The estimated total number of units to be produced. The wear and tear on the machinery is the result of the number of units it is expected to produce over its useful life. Estimated useful life. (Time an asset is expected to be used before it wears out and needs to be replaced.) Actual units produced. The number of units the asset produced during the current year.

43. PROFITABILITY & LIQUIDITY RATIO ANALYSIS Ratio analysis I t involves e x tracting information from financial accounts to assess business performance. The three main profitability ratios are: The gross profit margin The profit margin Return on capital employed (RoCE) T he two main liquidity ratios are: T he current ratio T he acid test ratio GROSS PROFIT MARGIN It measures the proportion of revenue that is converted into profit after paying off its Cost of Goods Sold (COGS). It can be compared to previous years to better understand business performance Higher and increasing profit margins are preferable, as it means that more revenue is being converted to cash example

44. POSSIBLE STRATEGIES TO IMPROVE GPM Increase sales revenue by selling more products or services. Use marketing to attract more customers and boost sales. Reduce direct costs by trying to negotiate better deals with suppliers, without lowering the quality. GROSS PROFIT MARGIN It shows the proportion of revenue that is turned into profit before interest and tax A high PM could mean that a firm is meeting its expenses very well WAYS TO IMPROVE PM Negotiate better payment terms with creditors and suppliers to ease cash flow. Try to get cheaper rent to cut fixed costs. Reduce indirect costs like utilities, admin expenses, or unnecessary services.

45. RETURN ON CAPITAL EMPLOYED (RoCE) WAYS TO IMPROVE RoCE Increase the level of profit generated without introducing new capital into the business Maintain the level of profit generated whilst reducing the amount of capital in the business Also known as the primary ratio It compares the profit made by a business to the amount of capital invested. It is a measure of how effectively a business uses the capital invested in the business to generate profit. LIQUIDITY RATIOS These ratios measure the ability of a firm to pay off its short-term debt obligations.

46. CURRENT RATIO This ratio makes a comparison of a firm's current assets to its current liabilities. A current ratio of 1 means the business has just enough current assets to cover its current liabilities. This is not ideal because any unexpected increase in liabilities could cause financial trouble or even bankruptcy. A very high ratio (e.g., 2) means the business has too many current assets, which may suggest it's not using resources efficiently. The ideal current ratio is around 1.5, which shows a healthy balance between liquidity and efficiency. POSSIBLE STRATEGIES TO IMPROVE CURRENT RATIO Reduce bank overdrafts by choosing long-term loans, but this could increase the interest payable and the gearing ratio. Sell long-term assets to increase working capital, but if the assets are needed again, the business will face leasing costs.

47. ACID TEST RATIO A stricter and more realistic indicator of how well a firm can meet its short-term obligations, as it removes stock as part of the current assets If the ratio is less than 1, the business’s current assets, excluding stock, cannot cover its current liabilities. This ratio is important because stock may not be sold and can become obsolete or deteriorate. This means the business cannot rely on stock to improve its working capital. Therefore, firms should aim for an acid test ratio of around 1. POSSIBLE STRATEGIES TO IMPROVE ACID TEST RATIO Sell off excess stock- less liquid current assets will be reduced and converted into a more liquid form of current asset Ask suppliers for an extended repayment period - current liabilities will not be reduced

48. 3.6. DEBT/EQUITY RATIO ANALYSIS - HL Efficiency ratio These ratios show how well a business utilises its assets and liabilities to generate sales and maximise profits STOCK TURNOVER RATIO The stock turnover ratio shows how well a business converts its stock into sales Before calculating stock turnover, it is first necessary to calculate the average value of stock held by a business in a given period It can be calculated using two approaches. One approach looks at how many times in a given period (usually a year) a firm sells its stock. The formula is: