Both annual and interim P&Ls serve a similar purpose: they calculate the financial return that a business has received from its activities. They include details of:
-
Sales - also referred to as
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Purchases and expenditure (known as )
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The (or loss) that the business made over the period in question.
The relationship between these items can be explained as:
Sales minus Costs = Profit
Like all financial statements, P&Ls include accounting or financial terms that you may not be familiar with at
present.
A Balance Sheet is a snapshot of a business's financial position at a particular point in time. It compares what it owns (or, in the language of accounting, its assets) with what it owes (otherwise referred to as its liabilities). Assets and Liabilities are also sometimes referred to as the different sides of a Balance Sheet. As the name implies, these 'sides' must balance: the business's total assets must be equal to its total liabilities. To see definitions of the different items that make up a Balance Sheet, go to the screen.
The type of Balance Sheet that you produce - and, indeed, whether or not you need to produce one - depends partly on the type of business you own or manage. To find out more about the requirements that apply to your business, select one of the business types listed below:
Even if does not stipulate that you need to produce a Balance Sheet, there may be occasions on which the Bank (or another organisations) may ask you to do so.
Task six:
To:- Raphael
From:- Zetta Hayden
Date:- Autumn 2003
Title:- Comparison between Snax and Raphæl
Terms of Reference:- A formal report for Raphæl, interpreting and comparing both Companies. The report should include the key components of information used to monitor a business and should contain appropriate diagrams.
Procedure:- I have researched information regarding Raphæl’s complication. I have read through my GCSE Business Studies Second Edition Text Book by Alain Anderton and published by the Causeway Press (CPL). I have also went to the Natwest website because it is easy to access from my home computer through my 600k broadband connection. I also visited Nationwide, Barclays, Natwest and Lloyds TSB banks in Dover. I found out the details of small business loans, as Raphæl’s is a small business, however I will go into more depth on this research later on in this report.
Findings:- I have done research into loans as I have outlined under Procedure and found out the following of what Natwest has to offer: Different periods of repayment; they say that they will be able to help Raphæl choose a repayment period most suitable for his business: this might be 6 months, or 5 years. The Interest rates; the rates can be fixed at the outset, for the term of the loan, or can be variable, in which case they will move in line with fluctuations in Base Rate. The option of having a Payment holiday of up to three years,
they may be able to offer a repayment holiday for up to 3 years, when Raphæl’s will only need to pay interest on the loan. They offer Optional loan insurance, they say that Business Loan Protector offers peace of mind in the event of accident, sickness or death. The Single Premium Option, available only to sole traders with loans of up to £15,000, offers immediate cover and requires no medical. The Monthly Premium Option offers the same benefits, but covers up to 4 lives and is payable by monthly direct debit.
There are a number of calculations;
Profitability, = GROSS PROFIT X 100
SALES
Net Profit, = NET PROFIT x 100
SALES
Raphæl Snax
760 x 100 = 16.5% 509 x 100 = 9.00%
4600 5650
This information shows the comparison between the net profit margin for both you and Snax.
You can tell form the results that Snax has the better gross profit margin, this may be due to Snax buying cheaper raw materials and selling them at a higher price, if Snax do this they will make more of a profit which is not good for Raphæl, so I propose him to smash the snax factory with a pool-cue.
Working Capital Ratio:
Current assets =
Current Liabilities
Raphael Snax
2993 = 3.4 3872 = 2.3
883 1712
Acid Test Raphael
Current assets without stock = 2993- 1500
Current Liabilities 883
Conclusion:
Your net profit margin is better then Snax because you can control your expenses whereas Snax aren’t. You also have too much money where Snax may not be able raise money; he may not be able to sell his stock in time to pay his expenses, which could lead to Snax going out of business. Snax buy too much stock because they buy in bulk this means they get bulk discount. But will lead to Snax not having enough money to pay their bills.
Performance is better for your business as he makes a lot of money, as there are not many competitive branches in the area so he makes a lot of profit.
Recommendations:
I would give you two recommendations:
- When I compared the gross profit margins I could see that, Snax’s is better. For you to have the better gross profit margin I would suggest that you put the prices of your products up, and buy cheaper raw materials. This is an advantage because you will get an increase in profit. And the disadvantage is that if the prices increase the customers will decrease, but I don’t think that problem will affect the market you are in by much.
- At the moment you have a lot of money, which I suggest you could put in the bank and invest in the business and expand the business as too much money wastes money when you could be doing something with it like expanding and branching out.
Conclusions:- Snax has a better profit margin than Raphæl’s. From this I think that Snax is either buying raw materials at a low price or he may be charging more for his sandwiches. Raphæl’s net profit is better than Snax meaning that Raphæl’s is getting more money out of his sales. I figured this out by using the net profit ratio. Net Profit / Turnover (sales) x 100. By applying this equation to Raphæl’s I am going to find out what Raphæl’s Net Profit margin is:
£760 / £4,600 x 100 = 16.52 = 17
Profitability: -
Raphael Snax
2250 x 100 = 48.9% 3100 x 100 = 55%
4600 5650
Liquidity: -
Raphael’s
Current ratio = 2993 = £3.31
883
Raphael’s Stock
Turnover Ratio = 2350 = £1.57
1500
Snax Current assets = 3872 = £2.26
1712
Snax Stock turnover ratio = 2541 = £1.01
2500
Task seven:
To:- Raphael
From:- Zetta Hayden
Date:- Autumn 2003
Title:- Raphael’s Source of Finance
Terms of Reference:- Raphael wishes to expand his business and is thinking about investing in a second vehicle so that he can make more deliveries. Raphael believes he should be able to pick up a suitable vehicle for about £6,000, but in unsure of the best way to raise the required finance. Therefore I am going to prepare a report to Raphael recommending the most suitable method of finance for this particular situation.
Procedure:- In my research I found extra information from the following websites: www.bized.ac.uk, www skoool.ie and www.Google.com
I used the “GCSE business studies version 2” textbook by Alain Anderton
Findings:- A way for a business to raise money internally is to its sell assets. For example you might have brought some equipment, he may decide to invest in more up to date technology. He could then sell his old equipment to a business that needs that sort of equipment to contribute to pay for his new equipment. You could take a loan out from a bank so you could pay for new equipment you should aim to get a loan with low APR so there isn’t much interest to pay back.
If you need a second vehicle you could take an overdraft from the bank. Overdrafts can be more expensive particularly for small businesses. You have unlimited liability which means if you do not pay back you’re bills your personal possessions are at risk
You could also think of having a partner so that you won’t have to pay all the bills by yourself you could have financial support. Or you could have a sleeping partner who just invests in the business, a disadvantage to this though is that you would have to give the partner a share of you’re profit if you make a profit.
Raphael could let other business’ borrow his van for money which could contribute to buying a second van, this would save him taking out a loan from the bank.
Reccomendations:- Here are two recommendations:
1. I think that a new partner would be a good idea because it would improve the finance of the business, which could mean the business could buy a second vehicle due to more profit.
2. I think you should have limited liability because your personal possessions are at risk, it would only cost £40.