A2 Level - Business

Assignments

Class Notes

• See Page 2 Onwards

Important Links

A2 Business - Planner & Progress File

Past Papers - Yearly

• 9609 Business P3 Topical.pdfQuestions Booklet
• 9609 P3 Yearly 2010_2023.pdfYearly Booklet

Chapter 6 - Presentation Link:

Ch 06 - A2 External Inf on Bus Activity.pdf

Ch 07 – A2 External Economic Influences on Bus Activity

Class Notes

Chapter: Analysis of Accounts

Liquidity Ratios:

• Liquidity is when an asset is easily convertible in to cash.
• Why is cash important?

• To meet short term obligations (liabilities)

Current Assets; Cash, Bank, Account Receivables, Inventory:  20,000

Current Liabilities; Account Payables, Bank Overdraft                  15,000

• Working Capital; major cause of business failure

• Working Capital = Current Assets - Current Liabilities

        Situation 1  = 15,000 - 12,000 = 3,000 (cash)

        Situation 2  = 15,000 - 18,000 = -3,000 (shortage of cash)

1. Current Ratio:

Current Ratio = Current Assets / Current Liabilities x 100%

   = 15,000 / 12,000 x 100% = 125%

(We have 25% additional current assets available)

                  = 15,000 / 18,000 x 100% = 83.33%

(We have 17% shortage of cash)

HOW TO IMPROVE CURRENT RATIO:

1. Get a long term loans; this way the cash (Current Asset) will be generated and there would be no impact on the current liabilities.
2. Owner Investment/Share Issue; this way the cash is generated and there would be no impact on the current liabilities.
3. Sell extra non-current assets; After selling non-current assets, business will generate cash which later can be used to pay back short term liabilities.

1. Acid Test Ratio:

Acid Test Ratio = (Current Assets - Inventory) / Current Liabilities x 100%

= 12,000 / 12,000 x 100% = 100%

(We have NO additional current assets available)

                  = 12,000 / 18,000 x 100 = 66.67%

(We have 33% shortage of cash)

HOW TO IMPROVE ACID TEST RATIO:

1. Same as the current ratio.
2. Sell off inventories for cash.

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Liquidity Ratio:

1. Current Ratio

Current Ratio = Current Assets / Current Liabilities

                             = 1,300 / 1,000 = 1.3

Analysis: 30% extra cash; acceptable for business

Range: 20% to 40% Extra is acceptable

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Current Ratio = Current Assets / Current Liabilities

                             = 1,800 / 1,000 = 1.8

Analysis: 80% extra cash; underutilization of resources

Range: Over 40% is too much cash, must be used to pay-off loans

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Current Ratio = Current Assets / Current Liabilities

                             = 800 / 1,200 = 0.67

Analysis: Shortage of 33% cash; unable to payback current liabilities >> insolvency

Range: Less than 1.0 means shortage of cash; serious situation.

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Profitability Ratios

Gross Profit Margin:

GP Margin = Gross Profit / Sales x 100%

Gross Profit = Sales - Cost of Sales

HOW TO IMPROVE THE GROSS PROFIT MARGIN:

• Increase the Gross Profit;

• Increase the Sales/Revenue

• Increase the consumer base

• We were selling the product to 1,000 customer at $10 each, the revenue was 1,000 x $10 = $10,000
• Now if we start selling to 1,200 customers; the revenue would be; 1,200 x 10 = $12,000

• Increase the Selling Price

• We were selling the product to 1,000 customer at $10 each, the revenue was 1,000 x $10 = $10,000
• Now we increase the selling price to $13, now the revenue would be 1,000 x $13 = $13,000

• Decrease the cost of Sales

• Bulk Buying >> Economies of Scale
• Develop better supplier relations

• Timely payments to supplier
• Regular orders.

Net Profit /Operational Margins:

NP Margin = Net Profit / Sales x 100% (Unincorporated Business)

Operational Margin = Profit from Operations / Sales x 100% (Incorporated Business)

Net Profit = Gross Profit - Indirect Expenses

10,000 - 8,000 = 2,000

15,000 - 8,000 = 7,000

HOW TO IMPROVE THE NET PROFIT MARGIN:

• Increase the Gross Profit (See the section above on how to improve Gross Profit)
• Control / Manage the indirect expenses (operational expenses)

Return on Capital Employed:

• The amount of capital USED /UTILIZED in the business.

             ROCE = Net Profit / Capital Employed x 100%

           Capital Employed = Total Assets - Current Liabilities

           Capital Employed = Equity + Non-Current Liabilities

HOW TO IMPROVE RETURN ON CAPITAL EMPLOYEED:

• Increase the Net Profit; by controlling indirect expenses
• Lower the capital employed in business.

Inventory Turnover:

• It shows how many times a business is selling its inventory in one financial year.
• 
• Average Inventory = (Opening Inventory + Closing Inventory) / 2

• Example:

• Business A: Inventory Turnover is 5
• Business B: Inventory Turnover is 12

• How to improve Inventory Turnover?

• By lowering the inventory levels (buffer levels) in a business (towards JIT)

=====

Trade Receivable Turnover:

• It shows how many days a business is taking to receive its amount from credit customers.
• Lower is better
• Suppose the industrial standard is 30 days, but our business is taking 35 days to recover the amount:

• Good Thing: We are giving more time to customers >> Increased Credit Sales
• Bad Thing: More working capital requirements / Cash flow issues / Bad debts

Trade Payable Turnover:

• It shows how many days a business is taking to pay its credit suppliers
• Higher is better
• Suppose the industrial standard is 30 days, but our business is taking 20 days to pay the amount

• Good Thing: Supplier relations / avail cash discount option
• Bad Thing: More working capital requirements / Cash flow issues

HOW T

O SOLVE QUESTION IN CASE STUDY

• Situation 1:

• In case the Trade Receivable Turnover is 30 days where as trade payable turnover is 45 days.
• Possible Impacts:

• For 15 days the business can use this cash to recover cash flow issues.
• Supplier relations will be hampered (Sol: Decrease the TP Turnover)

• Situation 2:

• In case the Trade Receivable Turnover is 30 days where as trade payable turnover is 25 days.
• Possible Impacts:

• Working capital issues / cash flow issues for 5 days
• Solution: Quick recovery from Trade receivables (credit customer)
• Solution: Seek more time from suppliers

Gearing Ratio (D/E Ratio, Leverage)

• This ratio is also called as ratio of risk.
• Higher the ratio, higher the risk.
• 

Dividend Yield Ratio:

• It tests the reaction of the shareholders against the dividend announcements.
• AN: Higher the dividend, higher the attraction for spot traders
• AN: In case of same proportions; the investor won't be attracted
• AN: Long term investor is focused on the price of market share more than dividend returns.

Dividend cover ratio

• Dividend cover tells the company that how many times dividend can be paid from profit after tax. (Retained earnings)
• If the dividends given are less (with same level of profits) the ratio will fall
• If the dividends given are more (with same level of profits) the ratio will increase
• Business growth >> Credit Sales >> Working Capital Req >>

P/E Ratio:

• 
• EPS; higher is better.
• P/E Ratio Analysis:

• In case of increase in EPS, but no increase in P/E means that shareholders are not attracted in buying shares of the company.

• Reason: The competitor may be performing better than us.
• Reason: The PESTLE is not favourable

GP Margin Ratio:

            GP Margin = Gross Profit / Sales x 100%

                                =  230 / 330 x 100% = 69.7%

             Gross Profit = Revenue - Cost of Sales

                                   =  330 - 100

                                   = 230

OP Margin Ratio:

            OP Margin = Operating Profit / Sales x 100%

Inventory Turnover (times)

                        Inventory Turnover = Cost of Sales / Average Inventory

Trade Receivable Turnover

TR Turnover = Trade Receivables / Credit Sales x 365

                           =

P/E Ratio:

 P/E Ratio = Market Price of the Share / Earning Per Share

               EPS = Profit of the Year / Number of Shares Issued

Less Dividends >> High Retained Earnings >> Future Growth (Cap Intensive) >> Market Price of Share / Demand Increase

Gearing Ratio: (Debt to Equity)

                        = Non-Current Liabilities / Capital Employed x 100%

Capital Employed = Total Assets - Current Liab

Return on Capital Employed:

ROCE = Operating Profit / Capital Employed x 100%

               =

Capital Employed = Total Assets - Current Liabilities

Capital Employed = Non-Current Liabilities + Shareholder's Equity

Shareholder's Equity = Value of Shared Issued + Retained Earnings

Dividend Yield:

                                Dividend Yield = Dividend per Share / Market Share Price x 100%

   Year 2020 =  0.19 / 3.60 x 100%

                      = 5.28%

              Year 2021 = 0.25 / 4.00 x 100%

                                     = 6.25%

         Dividend per share = Total Dividend / Total Shares Issued

                    Year 2020  = 15 / 80 = $0.19

                    Year 2021 = 20 / 80 = $0.25

EXAM STYLE QUESTIONS – PRACTICE

8 Marks Structure

Assume eastern motors have a factory in your country. Analyze the impact of any two legal controls on his factory’s operations. [8]

[Def] Legal Controls are used as a tool by the governments to safeguard the negative impacts of business action on society /environment.

[KN] Laws related to Health & Safety of employees working around machines. For instance, govt may ask EM to provide proper safety equipment to its employees.

[AN + APP] In case of Northcape, if such provisions are made there will be increment in their level of motivation (as employees will feel safer while car manufacturing) and will lead to more productivity & less employee turn-over can be observed. (Currently, at 18.18% in Northcape against 15% in other factories).

[AN+] More productivity will lead towards lower cost of operations thus increasing profit margins of EM.

[AN+] Such profit margins will prove beneficial in terms of marketing & promotions to compete against the rivals (Asiatic Cars & western vehicles)

[KN] Laws related to keep environment healthy & cater benefits of society.

[AN + APP] As the consumer trend is changing towards hybrid cars using a push by celebrities as well, this will further make EM to shift its focus from fuel based family cars towards economical & environmental friendly cars.

[AN+] They may charge higher prices from the consumers, & further enhance their profit margins to spend more on R&D of futuristic cars.

[AN+] Increased competitiveness against other big guns & sustained brand image of EM. Additionally, EM can offer variety of cars for different market segments as well (like commercial / sports cars)

9609/32/O/N/20

Analyse how any two changes in the legal environment might affect GR. [8]

[Def] Legal environment are used as a tool by the governments to safeguard the negative impacts of business action on society /environment.

[KN] Changes in Minimum wage rate

[APP + AN] GR have to terminate some of its employees working in kitchen /waiters as increase in minimum wage rate would affect them negatively in terms of cost.

[AN+] This will further demotivate the employees thus further increasing the labour turn over.

[AN+] In case of absenteeism, it will further deteriorate the smooth operations of the restaurants, creating more dissatisfied customers.

[KN] Legal controls related to the zero hour contracts, may become illegal in future.

[APP + AN] The objective of 15% profit may become challenging; such employees are normally called up during the events like birthday parties. GR would be forced to have the part time / full time workers with them.

[AN+] Higher costs of training / operations

[AN+] In case GR works on the motivation of the employees by offering them financial /fringe benefits like bonuses on each event, may increase the loyalty amongst the workers leading to less turnover (from 22%) & 1450 days lost from absenteeism can be recovered easily.

12 Marks Questions;

Discuss the likely impact on employee efficiency of increased use of technology in the sugar production division. [12]

[Def] With same inputs, having more output of sugar.

[KN] Increased Productivity in sense of inventory management by use of software.

[APP+ AN] Maintained supply & less wastages in terms of inventory holding costs.

[AN+] Meet demands & better customer relations.

[AN+] Less holding costs will enable business to offer competitive pricing of sugar, creating additional sales / market share.

[KN] Better communication by using ERP systems

[APP+ AN] Short term costs of implementing where as long term benefits of Economies of Scale & quick decision making can be done by managers & regular supervision of employees will be possible.

[AN+] Since in sugar industry, there is a seasonal impact on hiring of part time employees, through ERP systems employee profiles can be maintained & can be called up on one click.

[AN+] It develops the sense of accountability amongst the employees leading towards efficient employees being rewarded & others being penalized.

[EVAL]

HOWEVER, Tech comes with a costs, which the business can't bear.

STS, find out the grey areas (case studies) in terms of wastages.

LTS, Go for the equity + debt financing.

It depends on overtime limits set by the govt (part time employees). Level of competition in terms of pricing strategies.