Small Business Evaluation

1. Small Business Evaluation Chapter 10

2. For any business to ascertain how it is performing the manager must look at a number of indicators such as:- • Financial Indicators such as profit or loss, the balance sheet, and by calculating profitability ratios. • Non Financial Indicators such as staff turnover, staff absence data, social responsibility, environmental impact and so on. How is the business performing?

3. A good manager will look at not only the financial data it will look at the non-financial data as well. Businesses have social responsibility as well as responsibility to have a good bottom line.

4. Is the measuring of a business’ performance against:- • The industry average • The market leader • A successful company These usually involve comparisons – cost, profitability, efficiency, and quality. Benchmarking

5. Is used as a financial report which shows the assets, liabilities and owners equity of a business. Assets – items of value that a business owns such as motor vehicles, premises, stock. Liabilities – items that a business owes to someone else such as loan, mortgage. Owner’s equity – what the business owes to the owner, includes capital which is the money the owner put into commence business. Balance Sheet

6. This is a report where a business calculates the profit or loss that it has made over a period of time. It shows all the revenue (money received from sales, interest received, rent received etc) and deducts all the expenses (money paid for items such as wages, telephone, electricity, rent expense). Profit – is when revenue is greater than expenses. Loss – occurs when expenses are greater than revenue. Profit and Loss Statement

7. Just using a balance sheet and profit and loss statement do not give an owner/manager sufficient information in relation to whether a business is actually making money. They need to measure areas of the business by using ratios:- • Gross profit ratio – gross profit x 100 sales This shows the mark-up available to cover other expenses and still make a profit. • Net profit ratio - net profit x 100 sales This shows the profit per dollar of sales and a manager can calculate whether sales prices are too low or costs are too high or vice versa. Measuring Profitability

8. This is used to calculate the amount the owner has invested in the business against the profit made. It is calculated by:- Net profit x 100 Owner’s equity OR Net profit – salary x 100 Owner’s equity Return on Owner’s Investment

9. This measures the effectiveness of the firm’s assets used to generate profit and allows the owner to compare investment in this area or elsewhere. Net profit x 100 Total assets Return on total assets

10. Gearing looks at how the assets of the business are financed. It involves these ratios:- Liabilities x 100 Total Equities Owner’s Equity x 100 Total Equities Measuring Financial stability

11. Liquidity is the speed in which an asset can be converted into cash. These ratios are used:- • Current Ratio Current assets x 100 Current liabilities • Quick Ratio Current assets – stock x 100 Current liabilities

12. Cash VsProfit Managers mistake increases in profit will mean more money in the bank and an increase in money in the bank will mean more profit. There are many transactions which will affect the bank but will not affect profit such as the owner withdraws money from the business, or the business sells goods on credit.

13. Include:- • Product service design and development • Marketing and sales • Administration • Manufacturing • Suppliers • People management Non- Financial Indicators

14. Is when a business evaluates its business performance in terms of:- • Profitability • Financial stability • Relationship with the environment and community Social responsibility affects the reputation of a business and can be measured in terms of “goodwill”. This can be expressed as a dollar value and is listed as an asset in the balance sheet. Triple bottom line

15. Environmental factors need to be measured by a business and they need to prepare a environmental area report which evaluates the direct and indirect resource use and waste, the efficiency of the use of resources, the impact of the activities will have on the habitat of the area, the business’ objectives in relation to environmental protection, the environmental awareness of its suppliers and compliance with all governmental regulations. Environment

16. No-one is infallible! When evaluating any business be aware of these common errors:- • Incorrect interpretation of information/data • Irrelevant data • The impact of unexpected influences • Concentrating on too many areas for improvement. Sources of error