Capital and Profits of a Business

Financial Statement of a Business

  1. Balance Sheet: Shows the financial position of a business at a certain point in time.
  2. Profit and loss account: Operational results of a business during a certain period in time.

Balance Sheet

Sources of Finance = Allocation of Finance
Capital + Liabilities = Assets




1. Capital Owned/Equity Capital/Net worth of Business
Amount of money that business owes to its owner at a certain point in time.

Capital Owned = Assets - Liabilities
Capital Owner = Capital at the start + Profit at the end - drawings

2. Fixed Capital
Amount of money that business has issued to acquire fixed assets at a certain point in time

3. Circulating Capital/Floating Capital
Amount of money that business has tied up with current assets at a certain point in time.

4. Capital Employed
It is the wealth actually used in the firm to earn income

Capital Employed = Capital Owned + Liabilities - Debtors
Capital Employed = Net Assets - Debtors

5. Capital Invested
Amount of money brought into business by the owner.

Capital Invested = Capital at begining - Drawings

6. Working Capital
It is the money used by the business to finance routine expenses.

Working Capital= Current Assets- Current Liabilities

7. Working Capital Ratio
Ratio show the extent of business financial stability

Working Capital Ratio = Current Assets / Current Liabilities

Working Capital should ideally between 1 and 2.

8. Liquid Capital
Liquidity is the ease with which one can fully convert its resources into legal tender. Legal tender is the medium of exchange which is balanced by the law of country.
It is a part of current assets which are in form of cash, bank balance and debtors.

Liquid Capital = Current Assets - Stock

9. Liquid Ratio/Acid Test Ratio
Shows the solvency position of a business. Solvency means being able to meet current liabilities.

Liquid Ratio = [Current Assets - Stock] / Current Liabilities

Stock is excluded because stock is difficult to convert to cash very quickly.

Profit and Loss

1. Turnover/Net Sales
It is the total value of goods sold in the year.

Turnover = Goods sold - Goods returned

2. Cost of Goods Sold
It is the cost of goods that have been sold.

Cost of Goods Sold = Opening Stock + Net Purchases - Closing Stock

3. Gross Profit
Overall profit on trading

Gross Profit = Net Sales- Cost of Goods Sold

4. Operating Expenses
Indirect expenses/Overheads/Oncost are fixed costs for example rentals, electricity bills and advertising costs.
Direct expenses are varying costs for example salaries and wages.

5. Net Profit
Final profit of the business after deducting all the expenses.

Net profit = Gross profit - Operating expences

6. Markup
Difference between buying and selling price ≠ Gross profit.

7. Percentage Markup

Percentage Markup = [Cost of Goods Sold / Total Sales] x 100

8. Margin
Profit out of a unit sale.

9. Gross Profit Percentage

Gross Profit Percentage = [Gross Profit / Turnover] x 100

10. Net Profit Percentage

Net Profit Percentage = [Net Profit / Turnover] x 100

11. Rate of Turnover

Rate of Stockturn = Cost of Goods Sold / Average Stock at Cost Price

12. Average Stock

Average Stock = [Opening Stock + Closing Stock] / 2

How Working Capital can be improved

  1. Injection of fresh equity (owners money).
  2. Long term loans.
  3. Sale of surplus fixed assets.
  4. More sales.