Learn by doing! Use this workbook in combination with FaBLinker on to learn and reinforce financial skills

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2 Learn by doing! Use this workbook in combination with FaBLinker on to learn and reinforce financial skills 1

3 Table of Contents Part 1 Financials Practice... 3 Practice 1 - An introduction to FaBLinker... 4 Practice 2 Exploring how overheads affect the financial statements... 5 Practice 3 Exploring how introducing new capital and buying fixed assets affect the financial statements... 6 Practice 4 Exploring the differences between cash and profit... 7 Practice 5 Exploring the cause and effect relationship between business transactions and the financial statements... 9 Practice 6 Exploring fixed and variable costs Practice 7 Bringing financial terms to life in FaBLinker Practice 8 Exploring sensitivity analysis Practice 9 Testing the business model Part 2 - Ratios Practice Guidelines for Ratio Practices Ratio Practice 1 Gross margin Ratio Practice 2 Net margin Ratio Practice 3 Calculate the new ROCE Ratio Practice 4 Exploring Liquidity Ratio Practice 5 Reinforcing the Ratio calculations

4 Part 1 Financials Practice 3

5 Practice 1 - An introduction to FaBLinker Link to FaBLinker on Open FaBLinker on Build this simple business model and watch the Interaction between the business model and the statements. Practice by changing the figures until you are confident that you can see the link between the business model and the statements. Selling price = 10 Purchase price = 5 Buy for cash = 150 units Sell for cash = 100 units Why did nothing happen to the statements until you entered the opening stock? Answer: It was the first transaction: the prices are nominal until a business transaction takes place. 4

6 Save this starting data as Practice 1 as we will build on it in Practice 2. Practice 2 Exploring how overheads affect the financial statements Link to FaBLinker on the file from Practice 1. Add overheads and save it as Practice 2. Practice by changing the figures until you are confident that you can see the interplay between the business model and the P & L. * Remember to enter 365 in the Debtor days and Creditor days cells in the business model column Selling price = 10 Purchase price = 5 Buy for cash = 130 units Buy on Credit = 20 units* Sell for cash = 80 units Sell on credit = 20 units* Fixed overheads = 100 Overheads paid = 100% 5

7 Practice 3 Exploring how introducing new capital and buying fixed assets affect the financial statements Link to FaBLinker Selling price = 10 Practice 2 and add new Share Capital, a new loan and buy an asset. Save the file as Practice 3, as we will use it again later. Practice by varying the figures until you are confident that you can see the interplay between the business model and the Balance Sheet. Purchase price = 5 Buy on credit = 20 units Buy for cash = 130 units Sell on credit = 20 Sell for cash = 80 units Fixed overheads = 100 Overheads paid = 100% Introduce new share capital = 500 Draw down a new loan = 300 Acquire new assets = 200 6

8 Practice 4 Exploring the differences between cash and profit Link to FaBLinker on Set up the business situation shown in the left column. Why do the figures show these results? What would be the effects on cash and profit if we: 1. Invested 2000 in share capital? 2. Drew down a loan of 1000? 3. Bought a fixed asset for 5000? 4. Depreciated that asset at 20%? Write down the answers before reading them below and explore on FaBLinker any ones you find difficult. Answers: on next page 7

9 Answers to Practice 4 1. Cash balance would be 22,000 and profit would be unchanged 2. Cash balance would be 21,000 and profit would be unchanged 3. Cash balance would be 15,000 and profit would be unchanged 4. Cash balance would be unchanged and profit would be 15,000 (see Capital and Revenue expenditure in the next chapter) 8

10 Practice 5 Exploring the cause and effect relationship between business transactions and the financial statements 9

11 Practice 6 Exploring fixed and variable costs 10

12 Practice 7 Bringing financial terms to life in FaBLinker Link to FaBLinker on Explore these situations in FaBLinker Liquidity Revenue expenditure Gearing Insolvent Working Capital Profit Loss Capital Expenditure And any others you can think of! 11

13 Practice 8 Exploring sensitivity analysis Link to FaBLinker on Practice 3 and complete the Sensitivity Analysis table below. Sensitivity Analysis Old Profit = 400 Selling price = 10 Purchase price = 5 Buy on credit = 20 units Buy for cash = 130 units Sell on credit = 20 Sell for cash = 80 units Fixed overheads = 100 Overheads paid = 100% Introduce new share capital = 500 Draw down a new loan = 300 Acquire new assets = 200 New Profit Change % Multiplier Sales Volume Selling Prices Cost of Sales Overheads Answer: New Profit Change % Multiplier Sales Volume Selling Prices Cost of Sales Overheads

14 Practice 9 Testing the business model Link to FaBLinker on Build a business model in FaBLinker. Test and reinforce your skills by exploring the effect which changing each of the following has on the three Key Results Areas. See if you can predict the impacts before you make each change. Selling Price Cost price Sales Volume Stock policy (buying volumes compared to sales volumes) Overhead expenses Collection times for credit sales Payment times for credit purchases Percentage of overheads paid New share capital New Loans Changes in loan interest Buy a new fixed asset Sell a fixed asset Write off a fixed asset quicker or slower (Vary depreciation charges) 13

15 Part 2 - Ratios Practice 14

16 Guidelines for Ratio Practices Before attempting each ratio practice write out the ratio calculation and validate it against the relevant information button. Method Clicking the Tutor On and rest the cursor over the relevant information button e.g. 15

17 Ratio Practice 1 Gross margin LOAD THE DATA SET INTO FABLINKER THEN EXPERIMENT USING THE PROMPTS IN COLUMN 3 Data set Gross margin Prompts Selling price 100 Purchase price 65 Buy for cash 3000 units Sell for cash 2900 units Base 35% Target 45% Note: Values to the nearest whole number decimals may be ignored What did you do to achieve the target? What unintended consequences might arise? What else could you have done? How realistic would your actions be in a competitive business situation? Find 2 ways 16

18 Ratio Practice 2 Net margin LOAD THE DATA SET IN FABLINKER THEN EXPERIMENT USING THE PROMPTS IN COLUMN 3 Data set Net margin Prompts Selling price 100 Purchase price 65 Buy for cash 3000 units Sell for cash 2900 units Fixed Overheads Variable Overheads 10% Base 9% Target 45% Note: Values to the nearest whole number decimals may be ignored What did you do to achieve the target? What unintended consequences might arise? What else could you have done? How realistic would your actions be in a competitive business situation? Find 4 ways 17

19 Ratio Practice 3 Calculate the new ROCE LOAD THE DATA SET IN FABLINKER THEN EXPERIMENT USING THE PROMPTS IN COLUMN 3 Data set ROCE Hints and correct answers Base 31.97% Note: If you opted to lease/hire the proposed new fixed assets at 950 per annum rather than borrow the money and buy it outright the ROCE would change to 32.85% Hint: Interest New loan Lease rent cost Answers Net Profit Capital Employed Can you calculate the new Net profit and Capital employed values that yield the new ROCE? 18

20 Ratio Practice 4 Exploring Liquidity LOAD THE DATA SET IN FABLINKER THEN EXPERIMENT USING THE PROMPTS Return the data to the original set after logging each change Data set Base Change New Current New Quick Ratio ratio Selling Price To Purchase price to Reduce cash purchases to 1000 units Change all sales to credit Reduce Debtor days to 45 Increase the new share capital to Can you track and explain each of the changes? 19

21 Ratio Practice 5 Reinforcing the Ratio calculations Link to FaBLinker on Build a business model in FaBlinker. Go through the ratios one at a time. Practice the calculation on paper or using a spreadsheet Read the information about the ratio in the glossary Explore the improvement tactics suggested in this chapter or the glossary Practice, practice and practice until you can instinctively understand what each ratio is saying about the business and the triggers that influence it 20