Analysing The Financial Performance Of A Business

Two shops on the same street report a profit of 150,000 last year. The first took 1,480,000 in sales to earn it; the second took 620,000. The owners could stand side by side and both say truthfully that they made 150,000, and one of them is running a far better business than the other. A single profit figure tells you almost nothing on its own. It only starts to mean something when you set it against the revenue that produced it, against last year, and against what somebody else in the same trade achieved.

This lesson teaches you to read financial statements rather than admire them. You will learn what an income statement and a statement of financial position each contain and what question each one answers, the difference between an asset and a liability and why a statement of financial position is only a snapshot, and the two calculations the specification requires: gross profit margin and net profit margin. Then you will use them the way the exam does, comparing one year with the next and one business with another, and reading the same figures from the point of view of an owner, a lender, an employee and a supplier, who all want different things from the same page.