BTEC Business: Ratio Analysis

This material trains the ratio analysis in Unit 3, Personal and Business Finance, of the Pearson BTEC Level 3 National Business qualifications: measuring profitability, liquidity and efficiency (content areas F3 to F5) and the limitations of ratios (F6). The specification lists the exact formulas to use and notes that they are not given in the external assessment, so the material uses Pearson's definitions throughout, for a sole trader as in the unit.

The focus is on the ratios that are easy to confuse or forget. For liquidity, you calculate the liquid capital ratio, also called the acid test, which leaves inventory out of current assets, and interpret the gap between it and the current ratio. For efficiency, you calculate trade receivable days, trade payable days and inventory turnover in days using average inventory, then explain what the figures mean: customers paying later than the agreed terms, a business paying its suppliers before its customers pay it, or perishable stock sitting on the shelves. For profitability, you work out capital employed before ROCE and separate mark-up from gross profit margin, a classic source of lost marks.

Calculation is only half of each task. Questions compare two years of the same business or two different firms and ask what the figures show and what the owner should do next, for example tighten credit control or sell surplus stock to raise the liquid capital ratio. Limitations are practised too: ratios use past figures, need a suitable benchmark and leave out qualitative factors.

The quiz has twelve questions with worked explanations that show where a wrong answer would come from, such as using opening instead of average inventory or dividing by total assets instead of capital employed. The flashcards hold every formula in the form Pearson uses. The written work has eight longer tasks marked against key points: two-year liquidity analysis, receivable and payable days together, inventory turnover, capital employed calculated two ways, mark-up against margin, limitations of ratios, deciding which of two firms is the safer customer for credit, and ways to improve liquidity. As a calculation topic, this material has no oral exam.

All businesses and figures are invented, and every question is original practice material, not taken from Pearson papers or mark schemes.

• Calculate the current ratio and the liquid capital ratio and explain the difference between them
• Calculate trade receivable days, trade payable days and inventory turnover in days using Pearson's formulas
• Calculate capital employed and ROCE, and distinguish mark-up from gross profit margin
• Interpret changes in ratios between two years or two businesses and recommend actions
• Explain the limitations of ratio analysis

Practice material written by Zestly, based on Pearson BTEC Level 3 National Business (2016 suite), Unit 3 Personal and Business Finance, F3 Measuring profitability, F4 Measuring liquidity, F5 Measuring efficiency and F6 Limitations of ratios, using the formulas stated in the specification (Issue 15, April 2023).