Essay
Unit 2: Business Resources- D2
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- Institution
D2: evaluate the adequacy of accounting ratios as a means of monitoring the state of the business in a selected organisation, using examples.
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BTEC LEVEL 3 90 CREDIT DIPLOMA IN BUSINESSUnit 2: Business Resources
D2- Evaluate the adequacy of accounting ratios as a means of
monitoring the state of a business in a selected organisation.
Introduction
This assignment further focuses on ratios and justify how much of an assistance
they can be to the business. Recommendations will also be suggested on how
the business can make any changes to increase their financial numbers to help
their financial health.
Accounting ratios are ratios that are, used to determine in depth how well the
business is performing financially. The ratios can be, used to determine if the
business is making a profit or loss and if they are any changes that need to be
made to prevent potential problems. This is, known as ratio analysis. Ratio
analysis is used to evaluate various aspects of a company’s operating and
financial performance such as its efficiency, liquidity, profitability and solvency.
Different ratios provide different information on the business performance.
Ratios can help the business to identify trend over a period. Being able to do so
will enable the business to incorporate budgets in their financial system. Doing
so will now enable them to plan for what money is spendable and what needs
the focus in the business. They can now make a higher profit. Ratios can also
inform a business on what money is spendable and if it is enough money to
cover said costs. Now the business will know if they need to increase any prices
to be able to covers those costs if they cannot do it now.
Gross Profit Margin Ratio is a profitability ratio, which will let the business
know if they are making a gross profit that is adequate for the business. It is a
financial calculation that can tell you, in percentage terms, a good deal about a
company's overall financial health. It reveals how much money is, left after
paying production to cover operations, expansion, debt repayment, and many
other business expenses. If this ratio is high, it means that the business is
performing well in the market.
Brunel University had a percentage of 89%, which means that for every £1, the
business generates 89p. This is a high percentage. With a high gross profit, the
business will be able to cover the costs for its operating expenses, if it is too low,
the business will have a net loss instead of net profit, which will affect the rest of
the accounts. Brunel University had a margin that is high, which enables them to
cover the costs of their expenses. If the university would like to see a higher
profit, then they may have to decrease the amount that the expenses have come
up to or increase sales or increasing the price of their products/services, but not
too much for high prices can push customers away.
Return on Capital Employed is also a profitability ratio that measures how
efficiently a company can generate profits from its capital employed by
comparing net operating profit to capital employed. This is a long-term
profitability ratio because it shows how effectively assets are performing while
taking into consideration long-term financing. This ratio takes into consideration
all of the business debts as well liabilities which will help them to give a better
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