ICT - until September 2007, Tarmac Online was a basic web-based system used by around 2,000 customers for confirming the details of invoices, delivery tickets and other documents. Customers who were taking receipt of a particular order could log onto the site to check their consignment against a scan of the original paperwork.
That was useful – especially when delivery tickets went missing or there was a dispute about an invoice – but it was cumbersome and limiting for both the company and its suppliers. It lacked timeliness, there was no means of drilling down into the data, and, most of all, it was restricted to the details available on the scanned documents. The lack of transparency and the inconsistencies between the scanned information and the data held in the company’s SAP business applications resulted in large numbers of calls from customers and a huge administration overhead So the company decided to revamp and chose the Microsoft Office SharePoint Server (MOSS2007), assessing the technology as particularly suited to ensure accessibility among its broad group of customers. The system’s capabilities, which went live in September 2007 after a five-month development effort and an equal time piloting the system, now far outreach those of its predecessor. The access to real-time information enables customers to manage their materials purchasing and accounts, improving interaction but also ensuring significant cost and time savings for Tarmac.
Characterised to customers as akin to online banking applications, Tarmac Online provides four core windows into the SAP data: E-Account, where customers can view their current statement, associated invoices and credit/debit notes; E-Order, allowing them to view their open quotes and place new orders for material directly; E-Tracking, letting them track, in real time, orders being dispatched; and E-Reporting, giving customers management reporting functionality that enables them to analyse material ordered and delivered.
3.1.5 Vehicles
Tarmac utilises local resources which reduces transport distances and vehicles can be loaded with different products to reduce the number of vehicle movements. Specialist computer software is also used to take maximum advantage of route planning and back-loading.
Tarmac's Tunstead Quarry in Derbyshire has been recently constructed and it is of the busiest sites in Europe, with product movements in excess of 6 million tonnes per annum. With more than 650 vehicle and multiple train movements every day carrying cement, lime, chemical stone, concrete aggregate, and raw materials into and out of the site, Tarmac is using an integrated weighing, automated cement loading and traffic management system capable of interfacing with its own SAP system to meet the diverse needs of this huge multi-operation facility.
3.1.6 Planned maintenance or refurbishment
The implementation of Biodiversity Action Plans (BAPs) is planned to take place at all the active mineral extraction sites by the end of 2008. BAPs complement the comprehensive restoration process that is put in place for the quarries after they are no longer in use, which often aims to enhance natural biodiversity and positively reintroduce former species back to the area. As the original aim of having all plans in place by the beginning of 2008 has not happened due to the amount of work required to implement BAPs half of the sites are fully implemented, 30% of the sites are nearing completion and 20% of the sites have had the work commenced on.
3.1.7 Emergency provision
One example is the Tarmac's Northern Ireland operation which received a request for funding to support the purchase of a defibrillator for the village of Ederney, County Fermanagh. A defibrillator works by helping to restore the natural heartbeat, if it has stopped, through the application of a short electric shock.
Tarmac's Carn Quarry is located just outside the village of Ederney, County Fermanagh in Northern Ireland, and is a significant employer in this mainly farming area. They were requested to support the purchase of a defibrillator for the village which works by helping to restore the natural heartbeat, if it has stopped, through the application of a short electric shock. Tarmac's general manager for Northern Ireland agreed with the local community organisers that Tarmac would provide funds to purchase the defibrillator on the basis that several people in the local area were trained in its use and that it would always be available to the community as a whole.
The village of Ederney is around 16 miles from the nearest cardiac ambulance, with a response time of around 20 minutes, due to the country roads. The defibrillator is now kept in the lobby of a new hotel in the village, and two groups of 12 local people are being trained in its use. This vital emergency equipment will enable a rapid response for local residents and the 20 people employed at Carn Quarry, increasing their chances of survival in the event of an emergency.
3.1.8 Security
One of the largest concerns regarding staff security has been the noise from on-site mobile equipment. This has been addressed through the installation of white-noise reversing alarms on all on-site mobile equipment and through control of the times of, and routes of, vehicle movements into and out of the production factories during unsociable hours.
To improve sites’ security Tarmac uses live willow matting to help drain silt ponds at its quarries. Silt ponds are typically generated at sand and gravel quarries as a result of the aggregate-washing process; this can create potential danger for on-site workers. Rolled out like a carpet across the water-logged area, the matting is made from live willow rods that take root in the silt, forming a fast-growing bed of trees. As the willow matting develops and grows, it also has the secondary benefit of creating new woodland, thereby providing a habitat to support local wildlife, adding visual interest and promoting biodiversity.
3.2 Technological resources
3.2.1 Intellectual property
One of the intellectual properties of Tarmac is its own name, a registered trade mark which name originated in 1903.
3.2.2 Accumulated experience and skills of staff
There are technical people in the company who solve technical issues raised by operational and commercial departments. They also liaise with technical support functions and customers. They ensure that products sold to customers meet national and international standards in terms of quality. For example an individual from operations could find a way to reduce the size of the average grain of sand before it goes into a concrete mixer. Technical operators, scientists, engineers and systems engineers would all work together so that the process could be used company-wide.
3.2.3 Software licences
One of the rights of Tarmac is their website which they own and through a contract in the section ‘terms of use’ state: “Our website and all of the related pages including but not limited to content, software, code, graphics or other material contained in or electronically distributed on this website is owned by us or licensed to us and is protected by copyrights, trade marks, service marks, patents or other proprietary rights or laws. Unauthorised use of any copyrighted materials; trade marks or any other intellectual property without the express written consent of the owner is strictly prohibited”.
3.2.4 Protection via patents and copyrights
Technical staff earns patents for the organisation e.g. Tarmac was the first to the UK market after successful trials in Wolverhampton and Bristol, working with the Transport Research Laboratory the Tarmac Porous Pavement technology to be used in housing developments, retail and business parks, and car parks.
The company is also protected through copyrights on the use of the website and all information provided on it.
4 CONCLUSIONS
Tarmac takes its responsibilities towards the seriously. It locates its business near to raw material sources or to its . This is -effective and contributes to reducing adverse impacts on the environment.
The company focuses on the safety of its employees and community by achieving a balance between its business and the environment.
Tarmac has a team of highly skilled technical staff to find the best solutions in order to improve production, reduce risks towards staff and be friendly to the environment.
BIBLIOGRAPHY:
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on 19/10/08, 28/10/08 and 30/10/08
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on 19/10/08
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on 28/10/08 and 29/10/08
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on 28/10/08 and 30/10/08
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on 29/10/08
P3 – Describe where sources of finance can be obtained for starting up a business
This information pack is aimed at people who want to set up a business and need to obtain finance. You will find information about internal and external sources of finance.
Internal sources:
Owner’s savings
It is easier to get a loan from the bank or attract investors if your own money is used in the business. It is expected that you will have savings otherwise it will be necessary to sell possessions or assets in order to raise the money.
One of the advantages of using your own savings is that you have more control than using other types of finance. A big disadvantage is that if you did not have savings and sold possessions or assets to set up the business you could lose what you invested.
Capital from profits
This is if you already have a business and you make profits which you use to reinvest in the business. This could be used to buy new machinery, marketing and advertising, vehicles or a new IT system. It is good because you will not have any costs as if you were to seek help through external sources. The main advantages are that you do not need to give any of your assets as guarantee and you do not own anyone money. The main disadvantage is that if you have shareholders you could frustrate them by retaining profits.
External sources:
Bank loans and overdrafts
A loan is an amount of money you borrow from a bank for a certain period and have certain time to repay it. The repayment amount depends on the size, duration of the loan and interest rate.
The term and price of loans vary by provider and may be negotiable. Any high street bank in the UK offers this facility such as RBS, Natwest, Abbey and Lloyds TSB. In general banks charge an initial arrangement or commitment fee which might be 1.75% for a £30,000.00 loan, falling to 0.25% for a loan of £1 million or more. You will also have to pay a fixed margin if you are borrowing less than £100,000.00 and this varies between 1% and 3%. You can repay your loan on a fixed rate, i.e. you can have up to 10 years to repay your loan without risking paying higher interest rates. RBS is charging a fixed interest rate of 8.9% p.a. if you borrow between £15,050 and £25,000.00.
Advantages: you just pay interest on the loan, you do not need to give part of the profits or shares of the company; you can fix the interest rate so that you know what you will be paying; you may pay only an arrangement fee at the start of the loan and you will have the money lent guaranteed for at least three years.
Disadvantages: problems to repay the loan monthly; there may be a charge if you want to repay the loan before the end of the term; most loans have very strict terms and conditions; lenders are not flexible and you will have to give as guarantee your personal possessions or assets of the business.
Overdrafts are the amount you could draw from your bank account for a certain period of time and they are ideal to cover day-to-day expenses. It usually costs more than a loan if you are using it for a long period of time, but interest rates vary depending on the provider. Overall banks charge setting up costs and interest rates; a typical arrangement or commitment fee might be 2% for a £5,000.00 facility, falling to 0.25% for facilities of £1 million or more. A fixed margin is also charged over the interest rate which could increase considerably the amount you will have to pay; this fixed margin varies from 1% to 5%. Interest rates vary and currently HSBC for example is charging an interest rate of 2.09% on overdrafts.
Advantages: an overdraft is flexible, you borrow the amount you are going to use only and you pay only for what you have used; it is quick to get the funds you need and you do not need to pay any charge if you repay it earlier.
Disadvantages: unlike business loans you can get an overdraft only from the bank where you hold a current account; you can not calculate your borrowing costs as the interest rate is variable; you will have to pay administration fees if you exceed the agreed limit and the lender could ask you to repay it at any time.
Commercial mortgages
A commercial mortgage could be taken to start or expand a business as it is linked with a purchase of a property. The mortgage is usually paid in 15 years or more and the property itself is the guarantee if payment of the mortgage is not made.
Cost varies according to the lender (it could be a bank or building society) and the type of repayment chosen. But basically you will have to pay an arrangement or processing fees which is about 0.5 to 1.5 per cent of the loan; valuation fee is charged by the lender to valuate the property and it can vary; legal and professional fees which are insurance, site surveys and preparation of legal documents.
Advantages are: you will be owning a property and paying for something that is yours rather than paying rent; with a fixed rate mortgage your monthly repayments will be predictable; you could sublet free space if you have reducing the amount of your repayment; as your business grows you will be able to extend your existing premises without having to relocate and your interest payments are tax deductible.
Disadvantages: if you have a variable rate mortgage you are exposed to increase in interest rates; any loss on the value of the property will decrease your capital; you need to pay the deposit which is much higher than the deposit you would pay for renting a property.
Financial advisers from your bank or your accountant could give the best advice on the institutions which offer commercial mortgages.
Venture capital
Venture capital is the term used for unsecured funding provided by specialist firms in return for a proportion of the company’s shares. It is a high risk investment because it is unsecured. The venture capital firm will be looking for a high return, at least 25% and may ask for representation on the company’s board. The main advantage of venture capital is that these firms could provide large sums to start the business and the main disadvantage is that this process could be very long as you will be required to draw up a detailed business plan, including financial projections for which you are likely to need professional help. If you pass the negotiation stage you will have to pay accounting and legal fees.
The Dragon’s Den programme on BBC is about venture capital where five big investors in the UK look for new businesses to invest by investing a large amount of money and expecting a high return as well sometimes up to 50%.
Hire purchase
Hire purchase (HP) is a common way of paying for major items such as vehicles, furniture and computers. Under a HP agreement you pay an initial deposit followed by monthly payments (a portion of the money you borrowed plus interest) over an agreed period. At the end of this period you have the option of owning the goods outright, although your lender may require you to pay a fee; however this fee could be very high. Most of car dealers offer this type of finance such as Mercedes Benz; and it is most commonly used to buy vehicles.
Main advantages: offers an excellent way to spread the cost of acquiring assets over their useful life; documentation completion and invoice arrangements with suppliers are relatively simple and fixed payments enable you to budget accurately and within financial projections.
Main disadvantages: a substantial deposit is normally required, between 5%-25% depending on the asset; there will be a penalty if the agreement is terminated and depreciation and age lead to a reduced return on assets.
Leasing/factoring
Leasing is a contract between the leasing company, the lessor, and the customer (the lessee). The leasing company buys and owns the asset that the lessee requires. The customer hires the asset from the leasing company and pays rental over a pre-determined period for the use of the asset.
Advantages: leasing can allow you to use better equipment (e.g. more efficient, faster equipment) and security as the leasing company owns the product so you do not need to provide further security.
Disadvantages: you never own the product; it remains property of the leasing company before and after the lease what means that you can not even sell it and maintenance as you are responsible for it as well as for repairs.
Factoring is a bit different; the business already established uses the service of a debt factoring firm. The factoring company provides the business with a percentage of the face value of the invoice, commonly 80% within days of an invoice being raised. The factoring company then assumes responsibility for collecting payment of the invoice, on receipt of payment the factor will pay the business the remaining 20%, whilst charging a fee for the service they provide. There are many firms offering this service, one example being Independent Commercial Finance Limited. The main advantage is the quickness to raise capital as for example a business that is owed £300,000 may be able to get £200,000 or more in just a few days. The main disadvantage is the cost as it will reduce the profit margin on each order and you have to pay extra to remove your liability for bad debtors.
There are several leasing and factoring companies, including banks and independent finance houses. Again your accountant would be able to advise you on the best in your area and also you need to make sure the company is a member of the FLA (Finance and Leasing Association).
Share issues
This would apply for limited companies or public companies and it is about selling shares of your company to investors. It is also called equity finance. The person or people who buy shares become owners of the company as well.
The main advantage of sharing issues is that you do not need to pay interest to investors or you do not need to pay any money back. Shareholders will receive dividends which are profits of the company.
The main disadvantage is that it is a quite complicated process and it should be done with help of professionals such as accountants and lawyers. If it is a public limited company a broker could resolve all issues.
Grants
You may apply for a grant or government support. And if you manage this type of finance it will cost you basically nothing as you might get a zero-interest loan. There are many disadvantages though such as competition as many people apply for the scheme, the need to meet the scheme’s criteria (i.e. size, location, use of the money), you can not use the money for general business costs and the grant does not cover everything, you will need more funds from other sources. One big advantage is that if you qualify you can have expert advice, information or subsidised consultancy and cost is also a good advantage.
You could apply for a grant through your local Business Link and their main website page is .
BIBLIOGRAPHY:
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on 03/11/08 and 10/11/08
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on 04/11/08
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on 03/11/08
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on 04/11/08
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on 04/11/08
P4 – Give the reasons why costs and budgets need to be controlled
Financial management of a business includes control of costs. Costs involve fixed and variable costs, break-even point and contribution.
Fixed costs: they do not vary with sales. For example: rent which does not increase or decrease if the business sells more or less, mortgages, loan payments, advertising, insurance and market research.
Variable costs: they vary with sales. For example: sale staff commissions, transportation, packaging and costs of raw materials.
It is important to control fixed and variable costs because they are the basis for any type of cost-volume-profit analysis so if this problem is dealt with first worst problems will be avoided in the future. For example if a company is not making enough profit one of the reasons could be an increase in the cost of raw materials which could be resolved by looking for new suppliers or buying more to get more discount.
Break-even point: it is when total costs equals total revenue. In other words sales and costs are the same and the company makes either a profit or a loss. If the company can sell at production levels above this point, it will be making a profit. If sales fall below this point, it will be making a loss. Establishing the break-even point helps a company to plan the levels of production it needs to be profitable.
Sales = Costs
Contribution: it is the difference between the sales revenue and the variable cost of each unit sold or made.
Contribution = sales revenue - variable costs
It is important as it is used to calculate the break-even point. If an extra item is sold, it will generate extra revenue. This revenue will first be used to pay off the extra costs caused by this unit (the variable cost per unit), and any remaining revenue contributes towards paying off the fixed costs, and hopefully making a profit.
Break-even analysis: it informs how many units of a product or a service must be sold (or how much revenue must be generated) in order to break even. It is an essential decision making tool as it helps to determine the exact amount of sales needed to cover all the costs associated with selling a product or service without gaining any profit or loss. The costs are product costs, advertising costs, overheads costs etc. An undertaking will start to bring profits after crossing the break-even point. It is important for existing businesses as it will allow them to take necessary measures to increase sales, decrease costs etc. and for new businesses a break-even analysis is important as it will help to establish how much they will need to sell to pay for its fixed and variable costs.
Calculating the break-even point
The Headliners Hair Salon is a new business and it will be used as an example to show how to calculate the break-even point of a business. The information sheet about the company can be found attached.
Contribution = sales revenue per item - variable cost per item
Contribution = £15.00 - £9.00 (£2.50 – direct materials, £5.50 – direct labour and £1.00 – variable overheads)
Contribution = £6.00
Break-even point = £10,000.00 (fixed cost p.a.)/£6.00 (contribution)
Break-even point = 1667 units approximately
This means that the company will have to sell approximately 1667 units per year to cover its total costs.
__ Fixed costs
__ Variable costs
__ Selling price
If direct material costs went up to £3.00 per unit then:
Contribution = £15.00 - £9.50 (£3.00 + £5.50 + £1.00)
Contribution = £5.50
Break-even point = £10,000 (fixed cost p.a.)/£5.50 (contribution)
Break-even point = 1818 units approximately
Headliners Hair Salon would have to sell 151 extra treatments to cover its total costs; an average of 13 extra treatments a month.
Considering that the company decreased the price of the treatment to £14.00/unit:
Contribution = sales revenue per item - variable cost per item
Contribution = £14.00 - £9.00 (£2.50 – direct materials, £5.50 – direct labour and £1.00 – variable overheads)
Contribution = £5.00
Break-even point = £10,000.00 (fixed cost p.a.)/£5.00 (contribution)
Break-even point = 2000 units approximately
Decreasing the selling price by £1.00 would make quite a big difference as more units would have to be sold to cover total costs. The company would only make a profit if it sold above 2000 treatments which is a lot.
For the third scenario, an increase in fixed costs to £11,000.00 pa:
Contribution = sales revenue per item - variable cost per item
Contribution = £15.00 - £9.00 (£2.50 – direct materials, £5.50 – direct labour and £1.00 – variable overheads)
Contribution = £6.00
Break-even point = £11,000.00 (fixed cost p.a.)/£6.00 (contribution)
Break-even point = 1833 units approximately
For fixed costs of £11,000.00 the company would have to sell 1833 units in a year to cover all costs.
If there was a decrease in overheads to £0.75 per unit:
Contribution = sales revenue per item - variable cost per item
Contribution = £15.00 - £8.75 (£2.50 – direct materials, £5.50 – direct labour and £0.75 – variable overheads)
Contribution = £6.25
Break-even point = £10,000.00 (fixed cost p.a.)/£6.25 (contribution)
Break-even point = 1600 units approximately
The best scenario is this where a reduction in overheads would occur. Only 1600 treatments would have to be sold to cover total costs whereas decreasing the selling price would be the worse as the company would have to sell much more treatments.
Budgeting is also part of the financial management of a business. Budgeting sets out the financial targets for your business. It helps you anticipate problems and compare what has actually happened with what you expected.
Budgets need to be regularly monitored (i.e. checked) to see if action needs to be taken.
It is important for a new business to have clear budgets. A budget is based on the and identifies key factors, such as what money is needed, for what purpose and where it will come from.
Many businesses fail in their first year of trading. There are many reasons, but typical ones include:
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lack of understanding of the – a failure to carry out
- underestimating the strength of the competition
- failure to secure adequate finance
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inaccurate estimates in constructing – for example, forecasts are too high and/or estimates too low.
Types of budget:
A well-structured , including budgets, can help a new business to avoid such problems. The most important budget is the sales one.
Sales budget
The sales budget sets out your expected turnover for each month of the next year.
Base your sales budget on the expected volume of sales of each product and the prices you intend to charge.
Headliner Hair Salon has set up a sales budget for 6 months (see attached).
The figures are calculated by multiplying the expected number of sales by the selling price of the product.
For example: for the first month (January) Headliner Hair Salon is expecting to sell approximately 667 units (667 units * £15.00 – selling price).
Variance analysis
Variance is the name given to the difference between the budgeted figure and the actual figure. For the Headliners Hair Salon example the variance for each month (from January to June) are negative (they sold less than expected).
Decisions then can be made based on the variance analysis. For example, if unfavourable variances are spotted actions can be taken such as:
- costs too high - cut out waste or change supplier
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too low - increase advertising//sales effort
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production too low - look to remove bottlenecks, etc.
BIBLIOGRAPHY
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on 11/11/08 and 17/11/08
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on 12/11/08
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on 16/11/08
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on 17/11/08
P5 – Interpret the contents of a given profit & loss account and balance sheet
The chosen organisation is Next Plc. The principal activities of the Group are high street retailing, home shopping and customer services management. Following are the Consolidated Profit & Loss Account and the Consolidated Balance Sheet for the years 2001 and 2002. I will be explaining what each term means on both statements.
Profit and Loss Account is usually done once a year to calculate how much profit (or loss) the company has made on the sale of their goods (or services if the company sells services). It is simply the deduction of what the company spent from what the company sold.
Weeks - the account starts relating how many weeks were considered in each year to calculate profit or loss which is normally 52 weeks.
Currency – it indicates which currency was used in the account. As Next Plc is a British company the currency used was sterling pounds.
Turnover – it is the value of sales made on a trading period. It is calculated by the average prices of items sold x the number of items sold.
Cost of sales – it shows how much the company spent on buying the goods at cost price before the company added its own profit margin. It is the amount the company paid for the goods to its suppliers. For other companies it could also be the cost of raw materials and the cost of manufacturing them.
Gross Profit – it is found out by deducting cost of sales from turnover.
Operating Expenses – this includes the cost paid to the supplier for the products sold during the year, distribution expenses, the running costs of the stores and advertising expenditure. It also includes head office costs necessary to run the overall business.
Operating Profit – it is the net profit made by a business before any exceptional items, finance costs or tax charges. It is calculated by deducting operating expenses from gross profit.
Other costs/income – other costs could be the cost of paying letting agents to handle a rental for example. Other income could be income from rentals (if material) or income from investments;
Profit before interest and taxation – it is profit made before deducting taxes or interest payable or adding interest receivable.
Net interest receivable (payable) – net interest receivable or similar income is interest received on loans. Interest payable or similar charges include interest payable on bank and short-tem borrowings. Next PLC added 7.2 million pounds to their profit from interest receivable.
Profit on ordinary activities before taxation – this includes all profit from any source, trading, interest or property, and represents the total results for the financial year.
Tax on profit on ordinary activities – it consists largely of the company’s corporation tax, but it may also include a number of technical accounting adjustments affecting taxation. The amounts shown were paid by the company and will be deducted from profit on ordinary activities before taxation to generate the profit on ordinary activities after taxation.
Profit on ordinary activities after taxation – the amount shown for profit on ordinary activities after taxation is simply a sub-total from the previous two lines (profit on ordinary activities before taxation - tax on profit on ordinary activities).
Equity minority interests – they represent shares owned by third parties when a company acquires another company. Next’s equity minority interests are 0 because it was not sold to other company (subsidiary) in 2001 or 2002.
Profit for the financial period – it is the total amount of net profit for the year that could be distributed to group members.
Dividends – dividends are amounts paid to shareholders out of the profits made by a public limited company. They are usually paid annually or semi-annually and it is a return to investments made by shareholders.
Retained profit – it is the profit retained in the company and invested to generate further profit growth in subsequent years.
Balance sheet is so-called because there is a debit entry and a credit entry for everything. The purpose is to show the value of a business at a specific point in time (for example the last day of the month or financial year). The total value of assets is the same total value of liabilities.
Balance sheets published by Public Limited Companies do not look very different from those prepared for internal purposes. The main difference is that they will normally be prepared for a group of companies, they will be far more detailed than a sole trader’s balance sheets, they will include comparative figures, and many pages of formal notes will be attached to them. For NEXT PLC the balance sheet explained is a consolidated one.
The Companies Act 1985 allows two different balance sheet formats:
1. Horizontal. This format requires the assets to be laid out on the left-hand side of the page, and the capital on the right-hand side.
2. Vertical. For this type of balance sheet the assets are listed first on a line-by-line basis, followed by the liabilities.
Next PlC’s balance sheet is presented on a vertical format.
Fixed assets – this heading relates the net book value of the fixed assets and they must be shown under three sub-headings: intangible assets, tangible assets and investments.
Intangible Assets – they are assets that are not of a physical nature, such as goodwill, patents, and development costs. Next PLC did not acquire any intangible assets for the years 2001 and 2002.
Tangible Assets – they include lands and buildings, plant and machinery, fixture, fittings, tools and equipment.
Investments – fixed assets investments are those that are intended to be held for the long term, i.e. for more than 12 months.
Total Fixed Assets – this heading represents the total of all the fixed assets.
Current assets – it is a heading for assets that are to be analysed into a number of categories. For Next PLC the current assets are: stock, debtors due within one year, short-term investments; and cash at bank and in hand.
Stock – as this is a consolidated balance sheet, it shows only the total amount of stock; but it must be disclosed under a number of categories, i.e. finished goods and payments on account.
Debtors due within one year – this shows the amount owed to the company. Usually it is sales on credit which will be paid within one year.
Short-term investments – it shows the amount invested by the company in a short-term (less than 12 months).
Cash at bank and in hand – it is part of the current assets and it is the total cash the company has at bank and in hand. The company earns interest at floating rates based on daily bank deposit rates. However deposits are for three months or less.
Total Current Assets – this line represents the total of current assets.
Creditors: Amounts falling due within one year - creditors have to be analysed between short-term creditors (i.e. those payable within the next 12 months), and long-term creditors (i.e. those that do not have to be paid for at least 12 months). This line shows the amount Next PLC owes that should be paid within one year.
Net Current Assets (liabilities) – it is what the company owes and must repay in a short-term. It is a sub-total of current assets less creditors: amounts falling due within one year.
Total assets less current liabilities – it is another sub-total: fixed assets plus net current assets less creditors: amounts falling due within one year.
Creditors: Amounts falling due after more than one year – this heading relates the amount the company owes to long-term creditors. The company can pay their creditors after 12 months.
Provisions for liabilities and charges – are provisions for pensions and similar obligations, taxation (including deferred taxation).
Net assets – it is total fixed assets plus total current assets less creditors: amounts falling due within one year; creditors: amounts falling due after more than a year; provisions for liabilities and charges.
Capital and reverses – this section is to explain how the net assets have been financed.
Called-up share capital – it represents all of the shares that have been issued, details of which will be shown in a formal balance sheet note.
Share premium – this is an account which records the extra amount on top of the nominal value of their shares which shareholders were willing to pay when they bought their shares. It does not attract a dividend, and it is permitted only a few.
Other reserves – this balance may include a number of other reserve accounts both of capital nature (i.e. reserves that cannot be distributed to shareholders) and of a revenue nature (i.e. amounts that may be distributed to shareholders).
Profit and loss account – this is the total of all the profits that have not been distributed to shareholders, less those that have been put into special reserve accounts. It is the deduction of capital and reserves from net assets.
Equity shareholders’ funds – it is the total of share capital and reserves.
Minority interests – they represent the proportion of the net assets of subsidiary companies which is owned by shareholders outside the group. Next PLC did not have any in 2001 and 2002.
Total capital employed – it is the capital used in the business. It is usually calculated as fixed plus current assets less current liabilities. For Next PLC creditors: amounts falling due after more than one year; provisions for liabilities and charges were also deducted from total assets.
Weighted average number of shares in issue in the period – this line relates the number of shares sold in the stock market during the year.
P6 – Illustrate the financial state of a given business by showing examples of accounting ratios
The business selected is Next PLC. Profitability, liquidity and efficiency ratios were calculated for 2001 and 2002.
Profitability
Year 2001
Gross profit margin = gross profit*100/turnover
Gross profit margin = 478.2*100/1588.5
Gross profit margin = 30.10%
Year 2002
Gross profit margin = 563.6*100/1871.7
Gross profit margin = 30.11%
This ratio is just to tell how much profit the company has made before discounting any costs to run the business etc.
So this means that Next PLC made 30.10% profit on the cost of sales in 2001 and 30.11% in 2002. Actually there was no difference between the two years.
Year 2001
Net profit margin = profit before interest and taxation/turnover*100
Net profit margin = 213.8/1588.5*100
Net profit margin = 13.46%
Year 2002
Net profit margin = 258.6/1871.7*100
Net profit margin = 13.82%
This ratio tells how much profit the company has made after all costs. It is based on the result of net profit that dividends, tax, etc will be paid. In 2001 the net profit margin for Next was 13.46%. In 2002 their net profit margin was 13.82%. Their net profit margin increased by 0.36% which is not a huge increase but it is still good; they might have had less costs in 2002, resulting in a bigger net profit or their suppliers could have given them more discount on the purchase of goods for example.
Efficiency
Years 2001 and 2002
Stock turnover = cost of sales/average stock
Stock turnover = 1308.1/(174.7+174.0/2)
Stock turnover = 1308.1/174.35
Stock turnover = 7.5 days
Average stock is stock at beginning plus stock at end of period : 2.
This result means that Next PLC held stock for about 7 days and half then it was sold after that. I believe it is not so bad to hold stock for about a week for a big chain like Next and as their business is to do with fashion, they constantly need to buy new styles of clothing and for different seasons from time to time. The company is constantly making purchases in order to supply demand and it never stops, resulting in a constant turnover which is good.
Year 2001
Debtors days = debtors due within one year*365/turnover
Debtors days = 269*365/1588.5
Debtors days = 61.81
Year 2002
Debtors days = 278.6*365/1871.7
Debtors days = 54.33
According to the results for 2001 and 2002 debtors are taking less days to pay Next, in 2001 they took 61.81 days to pay their debts and in 2002 they took an average of 54.33 days. This decrease in the number of days is good as it means that the company could have cash in hands more quickly and use it to cover its costs.
Year 2001
Creditor days = creditors: amounts falling due within one year*365/turnover
Creditor days = 346.6*365/1588.5
Creditor days = 79.64
Year 2002
Creditor days = 403.2*365/1871.7
Creditor days = 78.63
Next PLC in 2001 took 79.64 days to pay its creditors and in 2002 the company took 78.63 days. This result could be related to the debtor days’ result. It also decreased from 2001 to 2002, meaning that the company paid its creditors in a shorter period of time maybe due to the fact their debtors paid them in a shorter period of time as well.
Liquidity
Year 2001
Current ratio = current assets/current liabilities
Current ratio = 547.2/200.6
Current ratio = 2.73
Year 2002
Current ratio = 654.7/251.5
Current ratio = 2.60
These results are not bad in both years as the ideal result is 2:1. It shows the company has over 2.5 in current assets to pay its current liabilities. They are in a safe financial situation.
Year 2001
Acid test = (current assets-stock)/current liabilities
Acid test = 373.2/200.6
Acid test = 1.86
Year 2002
Acid test = 480/251.5
Acid test = 1.91
Again the ideal result is 1:1 at least and for both years the company is nearly 2:1 meaning they do have sufficient money to pay its current liabilities.
Return on capital employed
The return on capital employed ratio (ROCE) tells us how much profit he company we earn from the investments the shareholders have made in their company.
Year 2001
ROCE = profit for the year/equity shareholder’s funds
ROCE = 83.9/499.7
ROCE = 0.17%
Year 2002
ROCE = 100.8/546.9
ROCE = 0.18%
In 2001 shareholders earned 0.17% in return of what they invested and in 2002 they earned 1% more.
Asset turnover
Asset turnover measures how effectively a business is using assets to generate sales. It is:
Sales/assets
Year 2001
Asset turnover = 1588.5/527.6
Asset turnover = 3.01
Year 2002
Asset turnover = 1871.7/586.1
Asset turnover = 3.19
In 2001 turnover (sales) is 3.01 bigger than total assets and in 2002 turnover is 3.19 bigger than total assets. In other words the company was able to generate sales of £3.01 for every £1.00 of assets in 2001 and in 2002 the company generated £3.19 of sales for every £1.00 of assets.
Debt/equity ratio
Measure used to assess a company’s financial health. The ratio is calculated by dividing the company’s long-term debt (capital contributed by creditors) by the shareholders’ equity (contributed by owners).
Year 2001
Debt/equity ratio = 18.5/499.70
Debt/equity ratio = 0.04:1
Year 2002
Debt/equity ratio = 20.4/546.9
Debt/equity ratio = 0.04:1
For both 2001 and 2002 the debt/equity ratio was almost zero. This indicates the business prefers equity funding to debt funding which minimises the interest payment problems and the control problems of having a dangerously high level of long-term debt on the balance sheet.
Overall the company did well in 2001 and 2002 and in fact it did better in 2002. The company is in a solid financial health.
