1. A2 Unit 3:A2 Unit 3:
Strategies for successStrategies for success
3.3 Using financial3.3 Using financial
accounts to measureaccounts to measure
and assessand assess
performanceperformance

2. Balance sheetsBalance sheets
A balance sheet is a ‘photograph’ of the financial position of a
business at a particular point in time
There are three main sections to a balance sheet:
Assets
resources a business owns that have financial value
current assets are used up in production (raw materials)
fixed assets are used again and again (machinery)
Liabilities
what the business owes to others (its debts)
they can be short term (overdrafts) or long term (loans)
they are a source of funds
Capital
the money put into the business by the owners
it is another source of funds

3. Balance sheets balance!Balance sheets balance!
A balance sheet must ‘balance’ because
an increase in total assets must be funded from
somewhere
So:
Assets = capital + liabilities

4. Layout of the balance sheetLayout of the balance sheet
A typical balance sheet would be laid out as follows. The
figures relate to Morrisons supermarket for 2008 and
are in £ million
Non-current assets 6826
Current assets:
Inventories (stock) 451
Receivables (debtors) 191
Cash and cash equivalents 368
Total current assets 1010
Non-current
assets are
assets with a
lifespan of
more than one
year and
include
buildings,
equipment,
vehicles etc
Current assets
are assets
that are likely
to be changed
into cash
within one
year. They are
liquid assets.

5. Layout of the balance sheetLayout of the balance sheet
Current liabilities
Payables (creditors) (2063)
Net current assets (working capital) (1063)
Non-current liabilities (200)
Net assets (net worth) 4417
Capital
share capital 2907
reserves and retained earnings 1510
Total equity 4417
Capital employed 5763
Current
liabilities are
debts that
have to be
paid within 12
months. They
might include
money owed
to suppliers,
dividends,
taxation,
overdrafts
etc
Net current
assets
(working
capital) =
current
assets –
current
liabilities.
This indicates
whether a
business will
be able to pay
its day-to-
day bills
Non-current
liabilities are
amounts which
do not have to
be paid for at
least 12
months – they
are the long
term liabilities
of the
business and
include loans,
mortgages etc
Net assets
(net worth) =
(total assets –
current
liabilities) –
non-current
liabilities
It is an
indication of
how much the
business is
worth were it
to be sold
Capital is made
up of money
put into the
business by
shareholders
(share capital)
profit which
has been kept
in the business
rather than
given to
shareholder
(reserves and
retained
earnings)
Capital
employed =
non-current
assets + net
current assets

6. Using the balance sheetUsing the balance sheet
The balance sheet is useful to assess performance and
potential and allows
• analysis of asset structure
how money raised has been spent on different
assets
• analysis of capital structure
reliance on different sources of funds
• analysis of liquidity position (working capital)
can the business pay its everyday expenses?
• calculation of the value of the business
given by value of net assets

7. Paired taskPaired task
Choose a PLC and find its balance sheet in its latest
financial report to shareholders
Read pages 73 and 76 – 77 of your textbook to find out
about the range of financial ratios that can be used to
analyse the financial performance of a business
Use what you have learnt in lessons and at least two
financial ratios to analyse and comment upon the financial
performance / ‘health’ of your chosen PLC
Present your findings to the rest of the class using a
PowerPoint presentation prepared on your notebook
Email your presentation to stephenwalton@kingschester.co.uk

8. Working capitalWorking capital
Working capital is the amount of money needed to pay
for the day-to-day trading of a business
In the balance sheet it is calculated as
• working capital = current assets – current liabilities
Struggling businesses are likely to have low levels of
working capital
Rule of thumb
• a typical business will need current assets to be 1.5
to 2 times its current liabilities to operate safely
? why might a supermarket be able to operate with
negative working capital ?

9. The working capital cycleThe working capital cycle
Business
Suppliers
(payables)
Products
Customers
(receivables)
Cash drains
-dividends
-loan repayments
-new assets
-tax
Cash injections
-loans
-fresh capital
-sale of assets
Lag!
Lag!Lag
Lag!

10. The working capital cycleThe working capital cycle
The working capital cycle is commonly calculated as
length of working capital cycle =
length of time that goods are held
+ time taken for receivables to be paid
- period of credit received from suppliers
Calculate the working capital cycle if
• goods are held in stock for 14 days
• receivables are given 30 days to pay
• suppliers give the business 28 days to pay

11. Importance of working capitalImportance of working capital
Too little working capital (current assets too low and
current liabilities too high)
• production may be interrupted due to shortage of
stocks of raw materials
• may be unable to pay bills if there is too little cash
• may be unable to pay invoices if holds too much
trade credit

12. Importance of working capitalImportance of working capital
Too much working capital (current assets too high and
current liabilities too low)
• may suffer from high storage costs
• money is tied up in stock – this could be used to
reduce borrowing
• cash holdings could be used to earn interest
(opportunity cost) or pay off debts
• too high payables involves an opportunity cost of
lost interest and exposes the business to problems
of late payment
• estimated to cost £20 billion to UK business

13. Reasons for working
capital problems
Poor
control of
debtors
Poor
control of
debtors
Over and under
stocking
Over and under
stocking
OvertradingOvertrading
OverborrowingOverborrowing
Downturn in demandDownturn in demand
Seasonal
demand
Seasonal
demand