1_Partnerships

1_Partnerships

1. Profitibaility

   • ability of business to make a proft
   • Indicators
     • Gross profit on sales
       • Want: ratio must be high and increasing
     • gross profit on cost of sales
       • relates to target mark-up
       • Markup that you have achieved
         • Have we achieved the mark up or not?
           • stolen
           • giving customers to many discounts
           • staff taking for personal use
     • Operating profit on sales
       • usually less that gross profit on sales because we got operating expenses to subtract
         • want the ratio to be highest as possible because then we can keep more money
     • Operating expenses on sales
       • best: lowest ratio
         • if ratio ishigh
           • difficulty controlling costs
     • Net profit on sales
       • best: ratios must be high as possible

2. Solvency

   • Assets > Liabilites = solvent
   • Insolvent = Assets<Liabilities
     • file for bankrupsy
   • business solvent or bankrupt
   • Ratio must be 1:1 or higher = solvent

3. Liquidity

   • Cash flow of the business
   • Ability of partnership to pay short term debt
   • Indicators
     • Current ratio
       • CA:CL (set it out so CL is = to 1)
         • do not keep ratio 200000:100000
         • dont put 1:2 beause right hand side is always supposed to =1
           • Reason is to compare 1 year to the other
       • 2:1 or higher is usually better
     • Acid-Test Ratio
       • 1:1 or better
   • Operating efficiency
     • Debtors collection period
       • shorter the better for cash flow purposes
     • Creditors payment period
       • Compare debtors to creditors time period
         • if DCP is longer than CCP then cash flow problems occur
     • Period of stock on hand
       • How long stock is kept on shelves
         • Depends on product you sell
           • fruit and veg is short period
           • furniture is long period

4. Risk and Return

   • How risky it would be for a potential investor to put money into the business?
     • credit worthy?
       • indicator
         • debt/equity ratio
           • Best: low (0.5-1)
           • If ratio was 3:1 it means you owe 3 rand for every 1 rand owed to you
             • NOT credit worthy
               • RISKY
   • Return the business will earn
     • how much partners are earning from business
       • Indicators:
         • return earned by each partner
           • (salary of partner + interest +profit) / investment
         • return on equity
           • want it to be as high as possible
             • compare to other possible investments ex:bank
       • Return on capital

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