Check what you’ve learnt
This week we have discussed using some financial tools to analyse our reports, ratio analysis and breakeven analysis. Ratio analysis can help determine the financial health of your business. While you can get a good picture of the financial position and performance of our business, you should not rely on ratios alone. Also take into consideration non-financial influences on your business which may include, retention of customers, your product mix or fluctuating currencies.
Ratio Analysis is a starting point. Do consider both the financial results and non-financial influences to give greater explanations.
You have also learnt that breakeven analysis is a planning tool and should not be used as a decision-making tool. This analysis helps to quantify the number of unit sales needed to cover your costs - i,e., total sales equals total costs. We can use this tool to also determine the number of unit sales needed to achieve a desired profit.
Breakeven analysis assumes that all your stock is sold and that your costs are constant, so it should not be used for decision-making purposes.
This week, you helped Paul determine the profitability of his business using the financial analysis tools of ratio and breakeven analysis.
Using a business’s financial reports, ratio analysis is a useful indicator of the performance and financial situation of a business. Paul focussed on the profitability ratios dealing with his gross and net margins and return on his equity.
Breakeven analysis is used to calculate the volume of sales required to cover business costs. Using fixed costs, variable costs and the selling price, Paul was able to determine the volume of sales required to earn his desired profit of $10,000.
© RMIT University 2016