3.7.2 Analysing the existing international position of a business to assess strengths and weaknesses: financial ratio analysis

Essentially looks at how rich a business is. Adds up totals on last day of financial year, looks at what they owe + what they own. Show wealth/indebtedess of business - vital info for shareholders, managers, financiers + other stakeholders.

Shows where business obtained finances - liabilities. Lists assets prchased w/ funds. Helps bankers decide whether or not to:
 - invest in a business
 - lend it some money
 - buy the organisation

Essentially looks at how rich a business is. Adds up totals on last day of financial year, looks at what they owe + what they own. Show wealth/indebtedess of business - vital info for shareholders, managers, financiers + other stakeholders.

Shows where business obtained finances - liabilities. Lists assets prchased w/ funds. Helps bankers decide whether or not to:
 - invest in a business
 - lend it some money
 - buy the organisation

'Snapshot in time', shows position of company at any given time. Shows what business owes + owns in 1 day - shows assets + liabilities.

Foundation of balance sheet - firm's capital. May have come from shareholders, bankers or from reinvested profit. 

Non-current: long term assets eg:
 - land + buildings
 - plant/machinery/equipment
 - vehicles
 - patents/copyright

Current: short term assets eg:
 - inventories
 - receivables
 - cash

Companies 3 main sources LT capital: shareholders (share capital), banks (loan capital) + reinvested profits (reserves). Loan capital - interest charges that must be repaid, as must loan itself. Share capital + reserves both owed to shareholders, but don't have to be repaid - treated separately. Share capital + reserves known as total equity.

Financial performance - level of success/failure achieved by business. Typically measured by profit. Baance sheet gives vital clue to company's real performance over time through reserves, which shows accumulated, retain profit since business started trading. 

Records all business's revenues + costs w/in given trading period. Income statements constitute vital piece of evidence for those w/ interests in company. For many stakeholders, profit is major criterion by which to judge success of business:
 - shareholders obvious example of those assessing profitability
 - gov agencies eg tax authorities require data on profits/losses to be able to calculate liability of business to corporation tax
 - suppliers to business also need to know financial position of companies they trade w/ in order to establish reliability, stability + creditworthness
 - potential shareholders + bankers will also want to assess financial position of company before committing funds to business

Making profit is one of signif objs for organisations - motive that encourages many people to etablish own business/expand an existing one. W/o potential for making profit, why should companies commit time + resources to make risky venture? Income statement is important to charity as it is to company.

Data can be used:
 - to measure success of business compared w/ previous years or other business comapred w/ previous years or other businesses
 - to assess actual performance compard w/ expectations
 - to help obtain loans from banks/other lending institutions (creditors want proof business capable of repaying any loans)
 - to enable owners + managers to plan ahead; eg for future investment in company

4 main stages of income statement:
 - First, 'gross profit' calculated - diff b/ween income + cost of goods sold
 - Second 'operating profit' calculated - deducting main types of overhead eg distribution costs + admin costs
 - Profit before taxation calculated - inclusion of interest received by business + interest paid by it. Normally shown togetther as 'financing costs'.
 - Final stage, calculate profit after tax - detucying amount of tax payable for year + shows net amount earned by shareholders.

Beginning of 2015 no UK business had better press than John Lewis Partnership - become cross b/ween national treasure + business icon for m/c. Accounts showed b/ween 2008 + 2014 sales risen by half, yet profits stubbornly static. Balance sheet deteriorating - allowed them to build up analysis through strengths + weaknesses:
 Strengths
  - revenue by half bween 2008 + 2014; growth seems to have been obj + was achieved
  - market share of Waitrose + John Lewis risen massively
 Weaknesses
  - b/ween 2008 + 2014, decline in John lewis contribution to GB corporation (profit) tax. Partly b/c of policy of cutting corporation tax for big companies, but also b/c of falling profitability of business
  - deterioration in ST financial position of business, w/ current liabilities rising faster than current assets needed to pay them

Analysis shows published account can help analyse internal position of business - for potential benefit of customers, staff + suppliers.