Evaluating Business Performance Small Business Case Studies

Transcription

1 Effective 1 July 2006, educational distribution rights for: Evaluating Business Performance Small Business Case Studies Program copyright remains with the Producer. Ownership and copyright of the attached teacher notes and worksheets has been transferred to: VEA Inc. Effective 1 July VEA Inc 10 Mitchell Place Suite 103 White Plains, NY Phone: Fax: Website:

2 EVALUATING BUSINESS PERFORMANCE: Small Business Case Studies Teacher s Notes Notes Authors and Reviewers Belinda Taylor, B.BIS. Grad. Dip. Ed. The opinions expressed are those of the author and do not necessarily reflect the views of Learning Essentials Program Details PRODUCER: Learning Essentials DISTRIBUTOR: Learning Essentials LENGTH: 32 minutes FORMAT: DVD YEAR: 2006 LEVEL Senior Secondary Program Overview How well is your business running? Evaluating Business Performance helps us to answer this question and make decisions that will improve future performance. In this program the owners of three businesses talk frankly about profitability, liquidity, efficiency and stability. Key concepts are explained and students will gain an understanding of the accounting processes required to evaluate the business performance. Curriculum Links Features and Uses ACCOUNTING Decision making Reporting Analysis and interpretation of financial reports BUSINESS Financial planning and management Website FEATURES Actual business owners discuss the importance of and tools for evaluating business information Assessment of financial performance in key areas Calculations of ratios with the key areas Ready to use case study as a potential assessment task USES To complement classroom activities A discussion starter

3 Program Overview Business owners/ managers must be equipped with the tools and knowledge to answer the question how well is this business running? This program explores the methods used by a number of small business owners to answer this question and ultimately improve the performance and maximise the success of their businesses. The focus of the program is assessment of financial performance in four key areas of profitability, liquidity, efficiency and stability. DVD Timeline 00:00:00 Introduction 00:01:36 Why Evaluate Business Performance 00:07:03 How Can Business Performance be Evaluated? 00:11:34 Profitability 00:16:49 Liquidity 00:21:43 Efficiency 00:27:20 Stability 00:30:19 Conclusion 00:30:51 Credits 00:31:30 Program end Related Internet Sites

4 1. What are the 4 areas of assessing a business? a) P b) L c) E d) S Watching the Program BLM 1 2. According to John Osborne from Bounce Squash & Fitness Centre, what is the importance of evaluating a business? 3. Rose Chong Costumes earn revenue from: Hiring out costumes Manufacturing costumes Anything else to do with costumes The most profitable area of the business is: The least profitable area of the business is: 4. Stakeholder interests. Complete the gaps in the following table: Name of Stakeholder Interest in business Achieving a fair return for their investment in the business. Making sure cash is available to repay their loans on a timely basis.

5 Want to make sure the business is continuing and viable so they have a job in the future. Want to know the business will still be around.

6 Watching the Program BLM 2 5. How can a gym use industry average to compare performance? 6. Provide one example of: Financial Indicator Non-financial Indicator 7. List the key figures and ratios that can be used to assess profitability. 8. How can Anro Floor Care improve profitability? 9. Why is liquidity important to a business?

7 Watching the Program BLM List the key figures and ratios that can be used to assess liquidity. 11. What does debtors turnover show? 12. How does Rose Chong seek to decrease slow selling stock? 13. What are the measures of business stability? 14. What is the link between evaluating business performance and on-going success?

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9 Beyond the Program BLM 4 A. Case Study: Ski World Ski World is a ski equipment, clothing and accessories store located at the ski resort town of Mt Sovereign. 1. Suggest 3 measures the owners of Ski World can use to evaluate the performance of their business. 2. List 3 key stakeholders interested in the success of Ski World. 3. Can the owners of Ski World measure its success against other businesses? 4. The following sales results have been provided by Ski World: Sales & Hire Clothing $12,965 $5,887 $13,455 Sales Accessories (gloves, goggles, etc.) $4,002 $2,986 $4,885 Sales & Hire Equipment (skis, boots, poles etc.) $36,410 $19,300 $37,571 a) Comment on the sales trend for Ski World. b) Provide one possible reason to explain the change in sales. c) What additional information would be useful to explain the change? 5. Assessing Profitability Ski World provided the following data related to profitability: Return on Owners Investment 9% 20% Net Profit Ratio 5% 27% Gross Profit Ratio 42% 37% Return on Assets 11% 34% Net Profit $ 2,110 $18,596 Total Sales $39,477 $68,550 a) List the figures/ ratios that changed favourably from 2010 to b) Suggest one reason for the movement in the gross profit ratio.

10 c) What is the significance of calculating the return on owners investment?

11 Beyond the Program BLM 5 6. Assessing Liquidity The owner of Ski World has commented that one of the greatest challenges in operating this business is managing cash flow given the seasonal nature of our business. a) Explain what the owner means by this statement. b) Provide one piece of advice to help the business overcome this challenge. 7. Assessing Efficiency Ski World provided the following data related to efficiency: Debtors Turnover Stock Turnover Creditors Turnover Credit terms on purchases Credit terms on sales days 109 days 33 days 30 days 14 days a) Calculate the cash cycle (stock turnover + debtors turnover). What does this figure show? b) Comment on the debtors turnover figure. c) Provide 2 pieces to advice for the owners of Ski World to use to encourage debtors to pay within their credit terms. 8. Assessing Stability Ski World s gearing ratio has increased in recent years and is currently at 57%. The owners are concerned that further increases in the gearing ratio will negatively impact on the long term stability of the business. Comment on the relationship between gearing and the stability of a business. 9. How often should business owners/ managers evaluate business performance?

12 Beyond the Program BLM 6 B. Interview At the conclusion of the program students conduct an interview with a small business owner on their methods and measures of evaluating business performance. Questions to ask: 1. How do you evaluate the performance of your business? 2. What measures do you use to evaluate profitability, liquidity, efficiency & stability? 3. What are some of the benefits of evaluating the performance of your business? 4. Compare and contrast the answers from your interview with those presented in the program. (100 words) C. Spreadsheet activity calculating ratios Using the financial statements provided, prepare a spreadsheet using formulas to calculate the following for Beachview Surf Shop: 1. Net Profit Ratio 2. Gross Profit Ratio 3. Return on Assets 4. Return on Investment 5. Working Capital 6. Quick Asset 7. Debtors Turnover 8. Creditors turnover (credit purchases for 2010 was $101800) 9. Stock turnover 10. Cash Cycle 11. Gearing

13 12. Interest Cover

14 Beyond the Program BLM 7 Beachview Surf Shop Statement of financial performance year ended June $ Revenue Cash sales 142,000 Credit Sales 79,050 Total Sales 221,050 less: Cost Of Goods Sold Cost of Sales 110,525 Gross Profit 110,525 Less expenses: Rent 16,800 Advertising 9,700 Wages 46,000 Interest on loan 650 Accounting fees 1,050 Telephone 3,000 Petty cash expenses 240 Total Expenses 77,440 Net Profit 33,085

15 Beyond the Program BLM 8 Beachview Surf Shop Statement of financial position at June $ $ CURRENT ASSETS Cash at Bank 4,157 Petty Cash Advance 100 Stock 22,355 Debtors 17,885 44,497 NON-CURRENT ASSETS Vans 100,000 Fixtures & Fittings 7, ,200 TOTAL ASSETS 151,697 CURRENT LIABILITIES Creditors 21,922 Loan West Bank 12,000 33,922 NON-CURRENT LIABILITIES Loan West Bank 22,000 22,000 TOTAL LIABILITIES 55,922 OWNERS EQUITY Opening capital 112,690 Add: Net Profit 33,085 less: Drawings 50,000 95,775 TOTAL EQUITIES 151,697

16 Beyond the Program BLM 9 Beachview Surf Shop Cash Flow Statement Year ended June CASH FLOW FROM OPERATING ACTIVITIES $ $ Inflows: Cash sales 142,000 Debtors 85, ,772 Outflows: Payments to Creditors (74,225) Rent (16,800) Advertising (9,700) Wages (46,000) Interest on loan (650) Telephone (3,000) Accounting fees (1,050) Petty cash expenses (240) (151,665) Net Cash Inflow operating CASH FLOW FROM INVESTING ACTIVITIES Inflows: 76,107 Outflows: Purchase of Van (34,000) Net Cash Outflow investing (34,000) CASH FLOW FROM FINANCING ACTIVITIES Inflows: 0 Outflows: Loan (12,000) Drawings (50,000) Net Cash Outflow finance (62,000) Net decrease in cash (19,893) Bank Balance beginning 24,050 Bank Balance at end 4,157

17 Other Relevant Programs Available from Learning Essentials Accounting for the GST in Small Business Case Studies of Accounting Issues To preview please quote number LE106 All small business must pay tax. Business owners need to know how tax affects the record keeping of their business. This program focuses on the impact of the Goods and Services Tax (GST) on recording financial information and how the use of information technology has helped business owners in complying with tax laws. Key concepts are explained and students will gain an understanding of the effect of the GST on invoices, the Business Activity Statement (BAS), the impact of the GST on journals and reports. Accounting For Small Business Series To preview please quote number LE073 This new accounting series consists of four accounting programs covering Cash Flow, Financial Stability, Financial Budgets and Profitability. Each program features an Australian small business as a case study in accounting and includes interviews with the business owners and a range of examples explained with clear and concise computer graphics. These programs will help students gain a better understanding of sometimes abstract accounting concepts by providing examples with which they will be able to readily identify. Australian Small Business: An Overview To preview please quote number VC556 Over 97% of all Australian businesses fall into the "small business" category, yet many of us have little understanding of how the so-called "engine room of the Australian economy" actually works. This program, hosted by Janet Russell from the Monash Mt Eliza Business School, examines such issues as the various definitions of small business, the typical management structure of a small business, common reasons why such businesses succeed or fail, the impact of technology, innovation and change as well as future trends and challenges.