Two of the most useful sources of financial information are an organisation’s balance sheet and profit and loss account. In the understanding the numbers learning module we look at what each contains and how to analyse each one to gain valuable insight into an organisation’s financial position.Maths for managers and figuring out the figures.
Calling all managers. Do you:
- like to leave the analysis to the accountants?
- live in fear of the financials
- look at the photos, not the figures of your company’s annual report?
Then this is for you. Finance for non-financial managers.Or how to figure out the figures:
The starting point for a review of a company is the annual report.
How do you rating the performance of your company or any other company you might wish to examine?
Performance ratios are the key measures used to assess a company’s current or recent performance.
The main financial ratios are:
| Ratio | Calculated from | What it shows |
| Profitability | Profit before tax + interest sales | How much profit generated from each £ of sales; called the ‘profit margin’ |
| Profit before tax + interest capital employed | How much profit generated from each £ invested in company; called ‘shareholder return’ or ‘return on capital employed’ | |
| Liquidity | Current assets Current liabilities |
Ability of company to pay current debts; called the ‘current ratio’ |
| Sales activity | Sales Stock |
No. of times stock is replaced in one year; called ‘stock turnover’ |
| Leverage | Total debt Total equity |
Relative amounts of debt (high interest) and equity (shareholder funds) used to finance the company; called the ‘gearing ratio’ |
| Credit outstanding | Debtors Average sales per day |
Average no. of days customers take to pay bills; called ‘debtor days |
| Efficiency | Profit before tax + interest £ value of company assets | How much return a company is making on its assets; called ‘return on assets’ |
Once calculated, the ratio results can be measured against:
- the industry norms; i.e. what is acceptable or usual for the industry
- the original forecast levels; i.e. what the accountants expected
Then there are Company Accounts
Accounting in an organisation can be described in two ways:
- Management Accounting: The continuous process of analysis, planning and control in the context of providing decision support for financial decision makers.
- Financial Accounting: This covers the actual recording of every financial transaction and hence operates in a historical time frame. It is also involved in the preparation and publication of the external set of financial statements.
Two of the most useful sources of financial information are an organisation’s balance sheet and profit and loss account. In the understanding the numbers learning module we look at what each contains and how to analyse each one to gain valuable insight into an organisation’s financial position.
Every limited company must file reports with Companies’ House, detailing the Directors Report, the Balance Sheet, the Profit and Loss Account, together with a Statement of Funds.
Balance Sheet
A balance sheet is a snapshot of what the company owns and owes as at the close of business on a particular day, which is nearly always the last day of an accounting period. Figures for some of the fixed assets such as land and buildings may be historic, since unless they have been revalued they will be at the original cost plus any significant expenditure on alterations.
The balance sheets of large public companies have a series of explanatory notes which provide further valuable information.
Profit
A profit is the increase in the net assets of a company. It is calculated by comparing the balance sheet at the end and of an accounting period with a balance sheet at the beginning of that period, after making due allowance for capital paid in or dividends paid out.
Profit and Loss Account
The profit and loss account shows income and expenditure for a trading period.