Evaluating Financial Performance (AQA GCSE Business)

Revision Note

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Current Performance & Performance over time

Current performance

  • Information from the financial statements can be used to evaluate current performance

    • It can be compared with financial objectives set for the period

      • E.g. If a business set an objective to increase profit, its progress can be evaluated using the income statement

Worked Example

Valley Organics Ltd set a financial objective to increase net profit by 8% in 2023.

In 2022 it achieved net profit of £2.2m. Its net profit increased to £2.4m in 2023.

Calculate the increase in net profit between 2022 and 2023, and identify whether Valley Organics Ltd was successful in meeting its financial objective. [3 marks]

Step 1: Calculate the difference in net profit between 2022 and 2023

Difference space equals space 2023 space net space profit space minus space 2022 space net space profit

equals space £ 2.4 straight m space minus space £ 2.2 straight m space equals space £ 0.2 straight m [1]

Step 2: Calculate the percentage increase in net profit

Percentage space increase space equals space fraction numerator Difference space in space net space profit over denominator 2022 space net space profit end fraction space cross times space 100

equals space fraction numerator £ 0.2 straight m over denominator £ 2.2 straight m end fraction space cross times space 100

equals space 9.09 percent sign [1]

Step 3: Identify whether the objective has been met

Valley Organics has met its objective to increase its net profit by 8%, achieving an increase of 9.09%. [1]

Performance over time

  • Financial performance can also be compared over time

    • E.g. The revenue, gross profit and net profit, as well as profit margins, can be tracked and compared, side by side

Case Study

The table summarises Valley Organics Ltd.'s financial performance over the last four years.

Year

2020

2021

2022

2023


Revenue


£8.9m


£14.6m


£12.2m


£11.6m


Gross profit


£4.3m


£6.1m


£5.8m


£6.9m


Net profit


£2.5m


£2.3m


£2.2m


£2.4m

Key performance indicators

  • In terms of revenue, Valley Organics' best performance occurred in 2021

    • Its revenue in 2021 was 64% higher than in 2020

  • In terms of gross profit, Valley Organics' best performance occurred in 2023

    • Its gross profit in 2023 was 9% higher than in 2022

  • In terms of net profit, Valley Organics' best performance occurred in 2020

    • Its net profit in 2021 fell by 8%

  • Valley Organics achieved its highest gross profit margin of 59% in 2023

  • It achieved its highest net profit margin of 28% in 2020

  • Overall, despite impressive revenue, performance in 2021 was somewhat disappointing, with the lowest gross and net profit margins of the four years

  • Performance in 2023 was a significant improvement on 2021 and 2022 performance, with increased gross and net profit margins

Examiner Tip

Try to avoid making a judgement on one performance criteria. Look at the whole picture, as outlined in the case study above, and be prepared to make a range of calculations to support your evaluation.

Comparison with Competitors

  • Business performance can be compared with that of rivals

    • It is particularly useful if competitors are engaged in very similar operations

      • They are of a similar size

      • They make or sell similar products

      • They use similar accounting processes

Case Study

The table summarises Valley Organics Ltd.'s financial performance with its two close rivals in 2023.


Company


JGS Foods Ltd


Ferndale Farms Ltd


Valley Organics Ltd

Revenue

£12.7m

£9.2m

£11.6m

Gross profit

£8.2m

£4.7m

£6.9m

Net profit

£1.9m

£2.2m

£2.4m

Key performance indicators

  • JGS Foods Ltd earned the highest amount of revenue in 2023

    • Its revenue was 9.5% higher than Valley Farms Ltd's revenue

  • JGS Foods Ltd earned the highest amount of gross profit in 2023

    • Its gross profit was 18.8% higher than Valley Farms Ltd's gross profit

  • Valley Organics Ltd earned the highest amount of net profit in 2023

    • Its net profit was 9.1% higher than Ferndale Farms Ltd's net profit

  • JGS Food Ltd achieved the highest gross profit margin of 65% in 2023

  • Ferndale Farms Ltd achieved the highest net profit margin of 24% in 2023

Financial Performance & Stakeholders

  • Stakeholders consult the information in financial statements for a variety of reasons

Stakeholder Interactions with the Financial Accounts

Stakeholder

How they use the Statement of Financial Position

How they use the Income Statement

Investors/Shareholders

  • Used to identify the asset structure of the business and how their investment has been put to use

  • Used to calculate the working capital of the business and determine its solvency

  • Used to determine the rough value of a business, which helps make a judgement on whether their investment is growing

  • Interested in revenues, costs and profits earned, business growth and dividend payments

  • Shareholders may use ratio analysis tools to identify profit margins

Management

  • Used to identify the financial position of the business at a given point in time

  • It is useful to assess the working capital position of the business and determine if there are enough liquid assets to pay its bills

  • Provides information on the capital structure of the business, which helps guide decisions on whether to raise further funds through borrowing or via other means (e.g. share issue)

  • Interested in key performance data such as an improvement in sales revenue and net profit

    • This data can aid in business decision-making

    • Financial data can provide evidence to support the payment of bonuses

Lenders/Creditors

  • Look at the balance sheet to evaluate the company's solvency 

  • They are interested in the company's ability to pay back its debts

  • Consider profit generated, as this could indicate the stability of the business and level of risk it presents

Suppliers

  • Businesses with low levels of working capital may find it difficult to pay short-term debts, so suppliers may offer trade credit, but with stricter terms

  • Interested in the continued success of the company 

  • This information is also used by suppliers to determine the level of trade credit offered to businesses

Employees

  • Used to answer questions such as:

    • Is the business financially stable or are jobs at risk?

    • Has the businesses performance improved or worsened?

    • What is the business spending its money on?

    • How much are senior executives paid?

    • How much tax is the business paying?

  • Interested in profits earned, the potential for wage increases, and job stability

  • Employees may look at notes to the accounts that detail levels of executive pay

Government, regulatory bodies & tax authorities

  • Regulatory bodies use financial statements to ensure a business is complying with accounting standards and tax regulations

  • Tax authorities use financial statements to check the accuracy of tax returns and assess how much tax a business is liable to pay

  • The Income Statement can identify whether a business will continue to provide employment, place orders with other businesses and supply goods and services to the public sector

Local community

  • Generally interested in the stability of the business and what this may mean for jobs in the community

  • May want to see if the firm is generating enough profit to perhaps approach them for local sponsorship

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