Trading, Profit and Loss Account - Presentation

Here is a useful presentation created by my colleague Mr Arthur, I added some content, but the credit is all his.

http://www.slideshare.net/Marcus9000/trading-profit-and-loss-account

Gross Profit Percentage - Higher Business Management

What is Gross Profit Percentage Ratio?

It is a ratio used to measure how many pence of Gross Profit is earned out of every pound of sales.

FORMULA

Here is a reminder of the formula:

Gross Profit      x  100

Sales (Turnover)     1

HOW IT WORKS

Here is a worked out example of how to do the Gross Profit percentage. We shall say sales are £8 million and the Gross Profit was £6 million.

GP = £6 million   x 100

S   = £8 million        1

= 75%

This means that for every £1  of sales revenue, £0.75 remains after direct expenses are deducted. 

WHO USES IT?

Managers/directors/ shareholders to make comparisons year by year and also with similar companies in similar industries.

ANALYSIS AND INTERPRETATION

This percentage should be high in order to leave profit to cover remaining expenses.

An increase in this ration maybe down to a rise in sales or a fall in the cost of goods or even an increase in selling price.

Decrease in this ratio may be due to the flip arguments of the ones above (lowering the selling price or a rise in cost of goods) but in addition we have issues like cash stolen from the till or stock going off or pilfering.

Higher Business Management - Ratio Formulae

Here are some Ratio formulae. I’ll look into what each of them mean in more detail over the Christmas holidays. Enjoy!

Gross Profit percentage

Gross Profit      x  100

Sales (Turnover)     1

Net Profit percentage

Net Profit         x  100

Sales (Turnover)     1

Profit Mark-Up

Gross Profit            x 100

Cost of Goods Sold      1

Return on Capital Employed

Net Profit before

interest & tax        x 100

Capital Employed         1

Current Ratio

Current Assets

Current Liabilities

Acid Test Ratio

Current Assets - Stock

Current Liabilities

Higher Business Management - Where does the money come to finance a business?

Businesses cost money to run. As well as paying workers and making products, they have overheads to pay. Where does the money come from?

Two main sources of finance:

<![if !supportLists]>n<![endif]>Internal

<![if !supportLists]>n<![endif]>External

Internal Sources of Finance

<![if !supportLists]>n<![endif]>Owner’s Capital – this is the money raised at the start of the business or funds invested later by the owner

<![if !supportLists]>n<![endif]>Retained Profit – monies saved up over the years, but depends on turnover, mark-up, and control of costs

<![if !supportLists]>n<![endif]>Efficient firms use profits to reduce external borrowing and provide cash to pay any outstanding liabilities

External Sources of Finance

<![if !supportLists]>n<![endif]>Shares – two types: Ordinary and Preference shares. Ordinary dividend depends on profits, while Preference shares have fixed dividends.

<![if !supportLists]>n<![endif]>Debentures – a long term fixed interest loan (20-25 years). Debentures have first claim on profits.

<![if !supportLists]>n<![endif]>Mortgage – a loan secured on property -usually 25 years. If borrower doesn’t pay mortgage back, then lender claims property.

External Sources of Finance

<![if !supportLists]>n<![endif]>Loan –money lent to a borrower

<![if !supportLists]>n<![endif]>Hire Purchase – buy an asset and have use of it buy pay it off over a period of time

<![if !supportLists]>n<![endif]>Factoring – using a third party to recall your debts.

<![if !supportLists]>n<![endif]>Overdrafts – spending more than you have in your bank account

<![if !supportLists]>n<![endif]>Leasing – renting an asset

<![if !supportLists]>n<![endif]>Trade Credit – customers buy goods and pay for them later

Government Assistance

Some areas need more help from the Government due to high unemployment, poor infrastructure etc. Government provides Central Government Support and Local Government Initiatives.

Central Government Support

<![if !supportLists]>n<![endif]>Assisted Areas – certain regions of UK have priority to boost local economy. There are two kinds: Development Areas and Intermediate Areas.

<![if !supportLists]>n<![endif]>Regional Selective Assistance (RSA) – businesses can qualify for selective assistance allowing for project and training grants.

<![if !supportLists]>n<![endif]>Regional Enterprise Grants (REG) – aimed at small businesses, given Investment grants or Innovation grants.

<![if !supportLists]>n<![endif]>Enterprise Zones – aim to keep firms in certain areas of country, may be given tax breaks as incentive

<![if !supportLists]>n<![endif]>Urban Development Corporations – they manage and develop land by providing buildings, roads and services

<![if !supportLists]>n<![endif]>Training and Enterprise Councils (TEC) – responsible for funding of training and vocational education

Moscow to be the next City of London?

Major firms in the City of London are backing a plan to develop Moscow as an international financial centre.

Blue‑chip names including investment banks Barclays Capital and JP Morgan, the Lloyd’s of London insurance market and law firm Freshfields, are involved in the programme that has the backing of Russian prime minister Vladimir Putin and President Dmitry Medvedev.

The use of City expertise to bring western standards of financial and legal governance to the Russian capital follows Prime Minister David Cameron’s visit to the country in September.

The project is spearheaded by TheCityUK, the independent British financial services promotion group whose chief executive Chris Cummings said: “We are delighted to have won this work and we have made a terrific start. It is a real feather in the City’s cap.”

Cummings said the medium‑term aim was to establish Russia as the regional financial centre for the Russian federation, and farther down the line to develop the capital as an international centre of finance.

Cummings admitted there was “initially” some scepticism in the City about the project, centring on old concerns about the “rule of law and political uncertainty in Russia”.

Source: http://www.scotsman.com/business/interviews/city_gets_behind_plan_to_create_international_financial_hub_in_moscow_1_1986885

Higher Business Management - Sources of Finance

Leasing
Renting of vehicles or equipment
More expensive in the long term than buying the asset
Asset is replaced when obsolete
Spread payments

Share issue
Dividends have to be paid to shareholders
Loss of control possible
Can generate large amounts of money/capital

Debentures
A long term loan to plcs
Debenture holders receive fixed interest
Debenture holders receive the money lent back

Venture Capital (think Dragons' Den)
Venture capitalists lend money when banks think it is too risky
Large amounts lent but interest is high
Part ownership often needed in exchange for finance

Hire purchase
A deposit is required and the rest of the price is paid in instalments
Ownership remains with the finance company until the last instalmentis made

Mortgage
A large sum of money borrowed from a bank or building society to purchase property
Monthly repayments required (interest)
Long term borrowing eg 25 years

Grants
Some of the money paid by eg Local Authority or Government
No need to repay a grant
May be given if organisation is creating jobs in an area of highunemployment etc

Sale of asset (Divestment)
Equipment or property which is no longer required is sold off to raisecash

Retained profits
Profits made are not distributed to the owners but kept back for reinvestment

Higher Business Management - Cash Flow Question

From 2005 Past Paper

Identify 4 sources of cash flow problems and suggest one solution for each source you have identified.

Sources of cash flow problems:
too much money tied up in stock
allowing customers too long to pay debtors
not paying on time
high levels of borrowing along with high interest rates
high drawings
low sales
high expenses
purchasing capital equipment

Solutions
introduce JIT
offer discounts to encourage prompt payment
offer discounts/promote cash sales
sell any unused assets
reduce loans by eg increasing number of investors
debt factoring
sale and leaseback
extended credit
arrange overdraft/loan
cut costs
promote product or services

This is a question that turns up in one shape or another. The important thing to remember is the difference between identifying the problems and the actual solutions.

This is the kind of question that seems daunting, but in actual fact if you get to know it well, you will realise that the question can never really be worded too differently and that the same answers normally apply to what is in effect a banker question.