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Assessing

JC Business

TermDefinition
Users of Financial Information Management, Shareholders, Banks, Employees, Creditors
Liquidity The ability of a business to pay its short term debts as they are due
Current Ratio (Working Capital Ratio) Formula Current Assets/Current Liabilities
Acid Test Ratio Formula Current Assets (less closing stock)/Current Liabilities
1:1 Ideal result for Acid Test
2:1 Ideal result for Current Ratio
How to improve liquidity Sell a fixed asset, take out a loan, sell shares in the business
Gross Margin Formula (Gross Profit/Sales) X 100
Gross Margin Tells us the percentage of each euro of sales that is returned to the business in Gross Profit
Gross margin can be improved by: Increasing the selling price, finding a cheaper supplier for stock
Net Margin Formula (Net Profit/Sales) X 100
Gross Margin Tells us the percentage of each euro of sales that is returned to the business in Net Profit
Net margin can be improved by: Making cut backs in expenses, finding cheaper suppliers for utilities
Return on Investment Formula (Net Profit/Capital Employed) X 100
Return on Investment Shows the business and shareholders how much the business is making on the investment.
Return on Investment should be compared with.... the return from risk-free investments
A business is solvent when... its total assets are greater than its external debt
Over-trading When current liabilities are greater than current assets
Problems with too much stock: If it is perishable it may go off, May lead to over trading (too little working capital), Increased storage and insurance costs, Not easily converted into cash
Problems with too little stock: May lose sales, Damage the reputation
Limitations of Financial Information: Does not show customer loyalty, It does not show staff morale (is there industrial unrest?), Does not provide information about the economic/business climate, Fixed assets may be over valued, Key staff may have left the business
Why a business does a stock take: To calculate closing stock for the financial year. To identify damaged or obsolete stock. To identify is stock theft has been happening
Created by: dkellybusiness
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