Page 286 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 5 Financial information and decisions

ACTIVITY 23.1

Use the internet, newspapers or local knowledge to identify businesses which are performing better or worse this year than
last year, or who are performing better or worse than competitors.

1 Identify the factors that have affected the performance of your chosen businesses.
2 Make a presentation to the rest of your class about the performance of any two of your chosen businesses.

The performance of a business will be of interest to its internal and external

stakeholders. They may want to know such things as:
Stakeholder groups: see
Chapter 5, page 62.
Will the business
have profi ts to Will the business Will future profi ts
reinvest in the continue to exist rise or fall?
business? in the future?

Will it be able to
Will it be able to repay long-term
pay its debts?
borrowing?

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Figure 23.1 What stakeholders may want to know

ACTIVITY 23.2

Explain why each of the statements in Figure 23.1 might be important to one or more business stakeholders.

Measuring business performance
Since the main objective of all businesses in the private sector is to make a profi t,

Difference between profit profitability is an important indicator of how well a business is performing. As you
and cash: see Chapter 21, learned earlier, a business cannot depend on profit to survive. It must also have

page 271.
enough cash to pay its short-term liabilities. The business also needs some cash in

reserve so that it can pay any unexpected expenses. When looking at a business’s
performance you also need to consider how well it manages its liquidity.

The information on income statements and balance sheets can be analysed
using accounting ratios. These provide stakeholders with important information

to help them assess both the profitability and liquidity of a business and help to
improve their decision-making.
You have already learned about the importance of profit to business growth

and survival. You are now going to learn how to calculate and use the following
accounting ratios to analyse a business’s profi tability:
■ gross profit margin
■ profit margin
■ return on capital employed.