3.1.4 Financial Management

Financial Reporting

Income Statement (Profit and Loss Account)

The income statement shows a company's financial performance over a specific period.

Line Item	Description
Revenue	Total income from selling goods/services
Cost of Sales	Direct costs of producing goods sold
Gross Profit	Revenue minus Cost of Sales
Operating Expenses	Overhead costs (rent, salaries, marketing)
Operating Profit	Gross Profit minus Operating Expenses
Finance Costs	Interest paid on loans
Profit Before Tax	Operating Profit minus Finance Costs
Tax	Corporation tax on profits
Profit for the Year	Net profit after all deductions

Real Example: Tesco PLC (2023)

Item	Amount (£m)
Revenue	65,760
Cost of Sales	(62,180)
Gross Profit	3,580
Operating Expenses	(1,820)
Operating Profit	1,760
Finance Costs	(420)
Tax	(268)
Profit for the Year	1,072

Statement of Financial Position (Balance Sheet)

The Fundamental Accounting Equation

What it shows: The balance sheet must always balance. Everything the business owns (assets) must have been funded somehow — either by borrowing (liabilities) or by the owners' investment (equity).

Assets = Liabilities + Equity

Assets = everything the business owns or is owed (buildings, equipment, cash, receivables)

Liabilities = everything the business owes to outsiders (loans, supplier credit, overdrafts)

Equity = shareholders' funds — the owners' stake (share capital + retained profits)

In plain English: "Where did the money come from to buy everything we own?" It either came from borrowing (liabilities) or from the owners putting money in and profits kept in the business (equity). These must always add up to the same figure — hence the balance sheet always "balances".

Real Example: Marks & Spencer (2023)

Item	Amount (£m)
Non-Current Assets
Property, Plant & Equipment	3,840
Intangible Assets	460
Total Non-Current Assets	4,300
Current Assets
Inventory	820
Trade Receivables	280
Cash	520
Total Current Assets	1,620
Total Assets	5,920
Liabilities
Current Liabilities	(1,500)
Non-Current Liabilities	(2,240)
Total Liabilities	(3,740)
Net Assets (Equity)	2,180

Calculating Profit Measures

① Gross Profit

What it measures: How much money is left from sales after paying the direct costs of making or buying the goods sold — before any overheads are paid.

Gross Profit = Revenue − Cost of Sales

Revenue = total money received from customers

Cost of Sales = direct costs only (raw materials, manufacturing)

In plain English: "Of all the money coming in, how much is left once we've paid for the goods themselves?" Overheads like rent and salaries are not deducted yet.

② Gross Profit Margin (%)

What it measures: Of every £1 of sales, how many pence become gross profit. Tells you how efficiently a business converts sales into profit before overheads.

GPM (%) = (Gross Profit ÷ Revenue) × 100

In plain English: "For every £1 I sell, what percentage is profit before I pay my overheads?" A GPM of 40% means 40p of every £1 of sales is gross profit.

📊 Benchmarks vary widely by sector: supermarkets ~5–6%, clothing retailers ~40–60%, software companies ~70–80%

③ Operating Profit

What it measures: How much profit the business generates from its core trading operations, after paying all day-to-day running costs. This is the "true" picture of business performance.

Operating Profit = Gross Profit − Operating Expenses

Operating Expenses = overheads: rent, salaries, utilities, marketing, depreciation

In plain English: "After paying all the bills to run the business day-to-day, how much profit is left?" Finance costs (loan interest) and tax are still to be deducted.

④ Operating Profit Margin (%)

What it measures: Of every £1 of sales, how many pence survive after all operating costs. A more meaningful indicator than GPM because it includes overheads.

OPM (%) = (Operating Profit ÷ Revenue) × 100

In plain English: "For every £1 I sell, what percentage is profit after I've paid for everything it takes to run the business?" Always divide by Revenue — not gross profit.

📊 A-Level benchmark: above 10% is generally healthy; supermarkets typically 2–4%; tech firms 20–30%+

⑤ Profit for the Year Margin (%)

What it measures: The "bottom line" — of every £1 of sales, how many pence remain as final profit after every single deduction including interest and tax.

PFY Margin (%) = (Profit for the Year ÷ Revenue) × 100

In plain English: "After paying everyone — suppliers, staff, the bank, and the taxman — how much do we actually keep per £1 of sales?" This is what shareholders ultimately care about.

Worked Example: Fashion Forward Ltd

Data:

Revenue: £2,500,000
Cost of Sales: £1,500,000
Operating Expenses: £650,000
Finance Costs: £50,000
Tax: £60,000

Calculations:
Gross Profit = £2,500,000 - £1,500,000 = £1,000,000
GPM = (£1,000,000 ÷ £2,500,000) × 100 = 40%

Operating Profit = £1,000,000 - £650,000 = £350,000
OPM = (£350,000 ÷ £2,500,000) × 100 = 14%

Profit for Year = £350,000 - £50,000 - £60,000 = £240,000
PFYM = (£240,000 ÷ £2,500,000) × 100 = 9.6%

UK Supermarket Comparison (2023)

Retailer	GPM	OPM	PFY Margin
Tesco	5.4%	2.7%	1.6%
Sainsbury's	5.8%	2.1%	0.8%

Return on Capital Employed (ROCE)

What it measures: How efficiently a business uses all the long-term money invested in it to generate operating profit. Think of it as the "bang for your buck" of the entire business.

ROCE (%) = (Operating Profit ÷ Capital Employed) × 100

Operating Profit = profit from trading, before interest & tax

Capital Employed = Total Assets − Current Liabilities

In plain English: "For every £1 of long-term money tied up in this business, how many pence of operating profit does it generate?" ROCE of 20% means every £1 invested earns 20p of operating profit.

📊 ROCE should exceed the business's cost of borrowing — if you're paying 6% interest on loans but only earning 4% ROCE, the business is destroying value

Calculating Capital Employed

Capital Employed = the total long-term funds used to run the business (both debt and equity). It excludes current liabilities because those are short-term obligations, not long-term investment.

Capital Employed = Total Assets − Current Liabilities

In plain English: "Take everything the business owns and owes, then strip out the short-term debts (payable within 12 months) — what's left is the long-term capital base."

Good ROCE: Generally above 15-20%. Should exceed cost of borrowing.

Worked Example: TechManufacture UK Ltd

Data: Operating Profit £450,000, Total Assets £3,200,000, Current Liabilities £620,000

Capital Employed = £3,200,000 - £620,000 = £2,580,000
ROCE = (£450,000 ÷ £2,580,000) × 100 = 17.4%

Interpretation: For every £1 of capital, the company generates 17.4p of operating profit - a healthy return.

Rolls-Royce Holdings - ROCE Trend

2019: 8.2% - Moderate returns
2020: -6.3% - Pandemic impact
2021: -2.1% - Still recovering
2022: 4.6% - Beginning recovery
2023: 12.8% - Strong recovery as aviation rebounds

Return on Investment (ROI)

What it measures: The profit generated from a specific investment (e.g. a marketing campaign, new equipment) as a percentage of what was spent. Used to judge whether a particular decision was worthwhile.

ROI (%) = [(Return − Cost) ÷ Cost] × 100

Return = net financial gain from the investment (additional profit generated)

Cost = the original amount invested

(Return − Cost) = the net gain above the original outlay

In plain English: "I spent money on something — how much extra profit did I make as a percentage of what I spent?" ROI of 60% means every £1 spent returned £1.60 — a net gain of 60p.

📊 A positive ROI means the investment made money; 0% = break-even; negative = a loss on the investment

Worked Example: Marketing Campaign ROI

Scenario: Coffee shop invests £25,000 in social media marketing

Additional Revenue: £85,000
Additional Costs: £45,000

Net Return = £85,000 - £45,000 = £40,000
Net Gain = £40,000 - £25,000 = £15,000
ROI = (£15,000 ÷ £25,000) × 100 = 60%

Interpretation: Excellent 60% return - £0.60 profit for every £1 invested.

Greggs Digital Investment

Greggs invested ~£25m in digital ordering and app development (2019-2021):

Digital sales grew to over £300m annually
Market value increased from £1.3bn to £3bn+
Estimated ROI: Over 400%

Gearing

Gearing Ratio

What it measures: What proportion of the business's long-term funding comes from debt (borrowed money) rather than equity (shareholders' funds). It measures financial risk — the higher the gearing, the more the business depends on debt.

Gearing (%) = (Non-Current Liabilities ÷ Capital Employed) × 100

Non-Current Liabilities = long-term debt: bank loans, bonds, mortgages (due in 1+ years)

Capital Employed = Total Assets − Current Liabilities (the total long-term funding base)

In plain English: "Of all the long-term money funding this business, what percentage is borrowed?" A gearing of 60% means 60p of every £1 of long-term capital is debt — creating significant interest obligations and risk.

📊 Below 25% = Low gearing (safe, flexible) | 25–50% = Moderate | Above 50% = High gearing (risky, especially if interest rates rise)

Interpretation:
• Below 25% = Low gearing (low risk)
• 25-50% = Moderate gearing
• Above 50% = High gearing (high risk)

Worked Example: Comparing Two Construction Firms

Item	BuildRight Ltd	QuickBuild PLC
Non-Current Liabilities	£2,000,000	£6,000,000
Equity	£8,000,000	£4,000,000
Gearing	20%	60%

Analysis: BuildRight has low risk but may miss growth opportunities. QuickBuild faces higher risk but can amplify returns in good times.

UK House Builders Post-2008

Persimmon and Barratt maintain low gearing (under 20%) having learned from 2008 crisis when highly-geared builders collapsed.

Importance of Trends and Context

Boohoo Group Revenue Trend (2019-2023)

Year	Revenue (£m)	Change	Op. Margin
2019	857	+44%	9.7%
2020	1,235	+44%	10.1%
2021	1,745	+41%	9.3%
2022	1,980	+13%	4.0%
2023	1,565	-21%	0.6%

Analysis: Explosive pandemic growth reversed as competition intensified and cost-of-living crisis reduced spending.

Index Numbers and Percentage Changes

① Index Numbers

What it measures: How much a value has changed relative to a chosen starting point (the "base year"), expressed as a score where 100 = the starting point. Makes it easy to compare growth over time regardless of the original scale.

Index Number = (Current Value ÷ Base Year Value) × 100

Base Year Value = the starting reference point, always given a score of 100

Current Value = the figure in the year you are measuring

In plain English: "If we set the starting year as 100, what score does this year get?" An index of 135 means the value is 35% higher than the base year. An index of 80 means 20% lower.

② Percentage Change

What it measures: How much a value has grown or fallen between two points, expressed as a percentage of the original figure.

% Change = [(New − Old) ÷ Old] × 100

New = the more recent figure

Old = the earlier figure (the denominator — always divide by the original)

In plain English: "How much bigger or smaller is it compared to where it started, as a percentage?" A common mistake is dividing by the new figure — always divide by the old (original) figure.

Worked Example: Creating Index Numbers

Year	Revenue (£000)	Index
2019 (base)	£1,200	100
2020	£1,320	110
2021	£1,440	120
2022	£1,500	125
2023	£1,620	135

Revenue has grown 35% since base year (index of 135).

Limitations of Financial Reporting

1. Historical Nature

Financial statements report past performance, not future potential. Example: Carillion's 2017 accounts showed profits of £160m, yet collapsed in January 2018 with £7bn debts.

2. Excludes Non-Financial Factors

Doesn't capture: employee morale, customer satisfaction, brand reputation, innovation pipeline, environmental impact.

3. Subject to Accounting Policies

Different methods (depreciation, inventory valuation) produce different results. Example: Tesco's 2014 scandal overstated profits by £326m through accounting manipulation.

4. Window Dressing

Companies may manipulate figures: delaying expenses, accelerating revenue recognition, paying suppliers early to improve ratios.

5. Intangible Assets Undervalued

Internally-generated brands, customer relationships don't appear on balance sheet. Coca-Cola brand worth $80bn+ but not in accounts.

📝 Exam Tip: Evaluating Financial Statements

When asked to evaluate financial data in the exam, always structure your response around these four questions:

What does the figure show? — State what the ratio or figure actually means in plain English
Is this good or bad? — Compare against a benchmark (industry average, previous year, or rival company)
Why might this have happened? — Apply business context (e.g. cost pressures, investment phase, economic conditions)
What are the limitations? — Historical data only; ignores non-financial factors; window dressing risk

A Level 3 evaluation answer must acknowledge that financial data alone cannot give the full picture — always reference what else you would want to know.

Interactive Profit Margin Calculator

Cost of Sales (£):

Operating Expenses (£):

Finance Costs (£):

Tax (£):

Assessing Financial Position and Performance

Assessing Profits and Profit Margins

UK Fashion Retailers Comparison (2023)

Company	Revenue (£m)	Op. Profit (£m)	Op. Margin	Assessment
Next PLC	5,300	900	17.0%	Excellent
M&S	11,930	716	6.0%	Moderate
Boohoo	1,565	9	0.6%	Poor
ASOS	3,551	(248)	-7.0%	Critical

Worked Example: Trend Analysis

TechGadgets UK Ltd (3-year trend):

Metric	2021	2022	2023
Revenue	£5.0m	£6.2m	£7.8m
Gross Margin	45%	42%	38%
Operating Margin	18%	14%	9%

Assessment: Revenue growing 56% but margins declining - growth coming at expense of profitability. Possible aggressive discounting or cost pressures.

Assessing ROCE Relative to Sector

UK Companies by Sector (2023)

Sector	Company	ROCE	Context
Software	Sage Group	28%	High margins, low capital
Pharma	AstraZeneca	22%	Strong IP protection
Consumer Goods	Unilever UK	18%	Efficient brand management
Retail	Tesco	12%	Capital-intensive operations
Utilities	National Grid	8%	Regulated, stable returns

Assessing Cash Flow and Liquidity

① Current Ratio

What it measures: Whether the business has enough short-term assets to cover its short-term debts. It tests whether the business can pay bills due within the next 12 months.

Current Ratio = Current Assets ÷ Current Liabilities

Current Assets = cash, receivables, inventory — assets convertible within 12 months

Current Liabilities = debts due within 12 months: overdrafts, supplier payments

In plain English: "For every £1 we owe in the next 12 months, how many £s do we have available to pay it?" A ratio of 2.0 means £2 of short-term assets for every £1 of short-term debt. Below 1.0 means the business cannot cover its immediate obligations.

📊 Target: 1.5 to 2.0 | Below 1.0 = danger | Above 2.5 = possibly holding too much idle cash

② Acid Test Ratio (Quick Ratio)

What it measures: A stricter test of liquidity that removes inventory from the calculation. Inventory is the least liquid current asset — it may take time to sell, especially in a crisis. The acid test asks: can we pay our debts right now, without selling stock?

Acid Test = (Current Assets − Inventory) ÷ Current Liabilities

Why remove Inventory? Stock may take weeks/months to sell and convert to cash — you can't pay a supplier with unsold stock

In plain English: "If we had to pay all our short-term debts tomorrow — without selling any stock — could we do it?" A ratio of 0.5 means we'd only manage to pay 50p of every £1 we owe immediately — a serious problem.

📊 Target: 1.0 or above | Below 0.5 = severe short-term risk | Supermarkets often run below 1.0 (sell stock fast) — context matters

Worked Example: Liquidity Assessment

Item	HealthyRetail	StrugglingShops
Cash	£180,000	£35,000
Receivables	£120,000	£85,000
Inventory	£200,000	£280,000
Current Assets	£500,000	£400,000
Current Liabilities	£250,000	£450,000
Current Ratio	2.0	0.89
Acid Test	1.2	0.27

Assessment: StrugglingShops faces critical liquidity crisis - cannot cover current liabilities.

Debenhams Liquidity Crisis (2017-2020)

Year	Current Ratio	Situation
2017	1.8	Adequate but declining
2018	1.4	Concerning deterioration
2019	0.9	Entered administration
2020	-	Liquidation

Assessing Gearing Risk

Worked Example: Interest Rate Impact

Three companies with different gearing when rates rise from 5% to 7%:

Company	Debt	Gearing	Interest @5%	Interest @7%	Increase
Conservative	£2m	16.7%	£100k	£140k	+£40k
Balanced	£6m	37.5%	£300k	£420k	+£120k
Aggressive	£15m	60%	£750k	£1,050k	+£300k

Assessment: Aggressive Co. faces £300k extra costs - potentially devastating.

Thames Water - High Gearing Risk

Gearing: ~80% (extremely high)
Total debt: ~£14 billion
Rising interest rates significantly increased debt servicing
Struggled to fund infrastructure while servicing debt
Required emergency funding and regulator intervention

Assessing Shareholder Rewards

① Dividend Per Share (DPS)

What it measures: The cash reward paid to each shareholder for every share they hold. It tells you the absolute amount each share earns in dividend income, regardless of the share price.

Dividend Per Share = Total Dividends Paid ÷ Number of Shares

Total Dividends Paid = the total cash distributed to all shareholders

Number of Shares = total shares in issue across all shareholders

In plain English: "If we split the total dividend pot equally between every share, how much does each share receive?" A DPS of £0.50 means each shareholder gets 50p for every share they own.

② Dividend Yield (%)

What it measures: The dividend income as a percentage of the current share price. It tells you the "income return" from owning a share — how much you earn in dividends relative to what you paid for the share. This is what investors use to compare dividend-paying stocks.

Dividend Yield (%) = (DPS ÷ Share Price) × 100

DPS = dividend per share (the annual cash paid per share)

Share Price = current market price of one share

In plain English: "If I buy a share at today's price, what percentage income return will I get from dividends each year?" A yield of 5% means for every £100 invested in shares, you receive £5 per year in dividends. Note: a very high yield can be a warning sign that the share price has fallen sharply.

📊 Income investors (e.g. pension funds) typically seek yields of 4–7% | Growth companies often pay 0% — they reinvest profits instead

Worked Example: Comparing Dividend Strategies

Metric	GrowthTech PLC	MatureUtility PLC
Share Price	£12.00	£8.50
Dividend Per Share	£0.15	£0.51
Dividend Yield	1.25%	6.0%

Analysis: GrowthTech reinvests for capital growth. MatureUtility provides income - attractive for pension funds.

UK Dividend Champions (2023)

Company	Sector	Yield	Strategy
British American Tobacco	Tobacco	8.5%	Mature, returns cash
National Grid	Utilities	5.4%	Regulated, stable
HSBC	Banking	6.2%	Strong cash generation
ASOS	Retail	0%	Losses/restructuring
Ocado	Tech	0%	Growth company

Break-even and Margin of Safety

① Contribution per Unit

What it measures: How much each unit sold contributes towards covering the fixed costs — and eventually generating profit. It is the building block for all break-even calculations.

Contribution per Unit = Selling Price − Variable Cost per Unit

Selling Price = revenue received per unit

Variable Cost per Unit = direct costs that change with each unit made (materials, direct labour)

In plain English: "After paying the direct costs of making one unit, how much money is left over to put towards paying the fixed costs?" If contribution = £2.20 per unit, every sale chips £2.20 off the fixed cost mountain before profit begins.

② Break-even Output

What it measures: The minimum number of units that must be sold for the business to cover all its costs — the point at which total revenue exactly equals total costs and profit = zero.

Break-even Output = Fixed Costs ÷ Contribution per Unit

Fixed Costs = costs that do not change with output: rent, salaries, insurance

Contribution per Unit = calculated above — each unit's contribution to covering fixed costs

In plain English: "How many units do we need to sell so that all the individual contributions add up to exactly cover the fixed costs?" Every unit sold beyond this point generates pure profit.

③ Margin of Safety

What it measures: The buffer — how many units (or what percentage of current sales) sales could fall before the business tips into a loss. A larger margin of safety means the business is less vulnerable to a downturn.

Margin of Safety = Actual Output − Break-even Output

MoS (%) = [(Actual − Break-even) ÷ Actual] × 100

In plain English: "How far can our sales fall before we start making a loss?" Always divide by Actual Output (not break-even) when calculating the percentage. A MoS of 27% means sales could drop by 27% before losses occur.

Worked Example: Coffee Shop Break-even

Data: Fixed Costs £8,000/month, Price £3.50, Variable Cost £1.30, Sales 5,000 coffees

Contribution = £3.50 - £1.30 = £2.20
Break-even = £8,000 ÷ £2.20 = 3,636 coffees
Margin of Safety = 5,000 - 3,636 = 1,364 coffees
MoS% = (1,364 ÷ 5,000) × 100 = 27.3%

Assessment: Sales can fall 27% before losses occur - moderate buffer.

easyJet - Low Margin of Safety

Break-even load factor: ~75% of seats
Typical load factor: 91-93%
Margin of safety: Only 16-18%
COVID impact: Load factors below 50% = massive losses
Demonstrates airline business risk

Budget Variance Analysis

① Variance (£)

What it measures: The difference between what was planned (budget) and what actually happened. It tells a manager where performance deviated from the plan, in pound terms.

Variance = Actual − Budget

Favourable variance = better than expected (higher revenue or lower costs than budgeted)

Adverse variance = worse than expected (lower revenue or higher costs than budgeted)

In plain English: "What was the gap between our plan and reality?" Key rule: for revenue, actual higher than budget = favourable. For costs, actual higher than budget = adverse (you spent more than planned).

② Variance (%)

What it measures: The variance expressed as a percentage of the original budget — this makes it easier to assess the severity of the deviation, especially when comparing variances of different sizes.

Variance (%) = [(Actual − Budget) ÷ Budget] × 100

In plain English: "How big is the gap relative to what we planned?" A £5,000 adverse variance on a £10,000 budget (50%) is far more serious than the same £5,000 variance on a £500,000 budget (1%). Always divide by the Budget figure.

Worked Example: Quarterly Variance Analysis

Item	Budget	Actual	Variance	%	Type
Sales	£500,000	£465,000	-£35,000	-7.0%	Adverse
Materials	£150,000	£162,000	-£12,000	-8.0%	Adverse
Labour	£180,000	£175,000	+£5,000	+2.8%	Favourable
Overheads	£120,000	£128,000	-£8,000	-6.7%	Adverse
Op. Profit	£50,000	£0	-£50,000	-100%	Critical

Assessment: Critical - budgeted profit eliminated. Immediate intervention required.

Sports Direct (2022-23) Budget Variances

Metric	Budget	Actual	Variance
Revenue Growth	+8%	+5.2%	Adverse
Operating Margin	7.5%	6.1%	Adverse
Energy Costs	£52m	£78m	Adverse (50% over)

Response: Reduced expansion, cost-saving initiatives, revised future budgets.

Integrated Assessment: Greggs vs Pret (2023)

Metric	Greggs	Pret A Manger
Revenue Growth	+27%	+8%
Operating Margin	8.7%	2.3%
ROCE	22%	8%
Gearing	15%	42%
Position	Strong across all metrics	Adequate but challenged

Conclusion: Greggs' value positioning excelling in cost-of-living crisis. Pret's premium model under pressure.

📝 Exam Tip: Ratio Analysis Questions

For ratio and performance questions, the most common mistake is stating a figure without interpreting it. Always follow this pattern:

ROCE: Compare against the cost of borrowing — if ROCE < interest rate, the business is destroying value
Gearing: Context matters — 50% gearing may be normal for utilities but alarming for a retailer
Current ratio: Too high can also be a problem (cash sitting idle); always compare against the sector norm
Dividend yield: A very high yield may signal investors expect a dividend cut, not a bargain

For a 9-mark+ question, always bring in at least two different measures and acknowledge limitations — single ratios can be misleading.

Interactive Liquidity Calculator

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Ethics in Finance (A-Level Only)

Introduction to Financial Ethics

Key Distinction:
• Tax Evasion: Illegal - deliberately not paying tax owed
• Tax Avoidance: Legal but ethically questionable - using loopholes

1. Tax Avoidance - Ethical Issues

Common Strategies:

Transfer pricing: Shifting profits to low-tax jurisdictions
Offshore structures: Routing income through tax havens
IP arrangements: Holding patents in low-tax countries
Debt loading: Structuring internal loans for deductions

Arguments Against Tax Avoidance

Social contract breach: Companies benefit from infrastructure but don't contribute fairly
Unfair advantage: Multinationals can avoid tax, smaller businesses cannot
Reduced services: Lost revenue means cuts to health, education, services
Burden on others: Other taxpayers must make up shortfall
Undermines democracy: Companies choosing own tax rate
Reputational damage: Public backlash and boycotts

Arguments For (Defense)

Legal duty to shareholders: Maximize shareholder value
Perfectly legal: Following laws as written
Tax competition: Countries compete through low rates
Economic contribution: Employment, investment beyond tax
International competition: Must remain competitive

Case Study: Amazon UK Tax Controversy

Pre-2015 Structure: UK sales processed through Luxembourg, profits recorded there.

Year	UK Sales (£m)	UK Tax Paid (£m)	Effective Rate
2012	4,200	2.4	0.06%
2013	5,300	4.2	0.08%
2014	5,900	11.9	0.20%

Public Response: Parliamentary hearings, media campaigns, consumer boycotts, political pressure.

Changes (2015+):

Restructured to record UK sales directly
2020: Paid £293m tax on £13.7bn sales
2022: Paid £648m tax on £23.5bn revenues

Outcome: Reputational damage suggested ethical costs outweighed tax savings.

Case Study: Starbucks UK (2012)

Issue: No corporation tax on £1.2bn UK sales over 3 years.

How:

Royalties to Dutch subsidiary (6% of sales)
High interest on internal loans
Premium prices for beans from Swiss subsidiary
Created losses in UK, eliminating tax

Backlash: Massive protests, consumer boycotts, contract losses.

Response:

Voluntarily agreed to pay £20m over two years
Stopped royalty payments to Netherlands
Changed transfer pricing
Public commitment to "do the right thing"

Multinational Case: Apple's Irish Arrangement

Structure: European sales routed through Ireland with tax rate below 1%.

EU Investigation:

2016: Ruled illegal state aid
Ordered: Pay €13bn (£11bn) back taxes to Ireland
2020: EU General Court overturned ruling
2024: European Court reinstated €13bn bill

Controversy: Irish government defended Apple - didn't want the money!

Stakeholder Impact: Tax Avoidance

Stakeholder	Impact
Government	Reduced revenue for public services
Citizens	Reduced services; feeling of unfairness
Shareholders	Higher profits short-term; reputation risk long-term
Employees	Moral discomfort; risk of backlash
Customers	May boycott if disagree ethically
Competitors	Small businesses face unfair disadvantage
Communities	Reduced funding for schools, hospitals, infrastructure

2. Payment Terms - Ethical Issues

Supplier Payment Terms

Problems with Late Payment to Suppliers

Cash flow strain: Small suppliers face severe problems
Power imbalance: Large buyers exploit smaller suppliers
Business failure: Suppliers may go bankrupt waiting
Unfair burden: Suppliers providing free credit
Job losses: Supplier failures cause unemployment
Innovation stifled: Small businesses can't invest

Case Study: Tesco Supplier Practices

Controversial Practices:

60-90 day payment periods
Retrospective discounts demanded
Pay-to-stay fees for shelf space
Marketing contribution requirements
Waste charges for unsold stock

2016 Investigation:

Groceries Code Adjudicator found Tesco delayed payments
Fined £129 million - first and largest fine under Code
Deliberately delayed money owed to improve own cash position

Impact: Small farmers faced crises, some went out of business, "climate of fear" reported.

Case Study: Carillion Payment Practices

Payment Terms: 120-day terms, often delayed 6+ months.

When Carillion Collapsed (2018):

Owed £2 billion to suppliers
Hundreds of small businesses bankrupted
~1,500 supplier businesses affected
Thousands of jobs lost in supply chain
Subcontractors lost months of unpaid work

Government Response: Regulations proposed limiting payment terms to 30 days for government contracts.

Customer Payment Terms

Ethical Issues with Customer Credit

High interest rates: Exploiting financially vulnerable
Aggressive collection: Harassment and undue pressure
Targeting vulnerable: Marketing to those who can't afford it
Hidden charges: Unclear terms and penalty fees
Debt spirals: Trapping customers in cycles

Case Study: Wonga Payday Lending

Business Model:

Short-term loans until next payday
APR often exceeding 5,000%
Example: Borrow £150 for 18 days, repay £183.49 (22% interest)
Targeted people unable to access traditional credit

Ethical Problems:

Targeted financially vulnerable people
Made borrowing seem easy through marketing
Compound interest created debt traps
Sent fake law firm letters threatening legal action
Inadequate affordability checks

Regulatory Action:

2014: FCA introduced cap - 0.8% daily interest, max 100% total cost
Fined £2.6m for unfair debt collection
Required to write off £220m owed by 330,000 customers
2018: Wonga collapsed into administration

Stakeholder	Impact
Customers	Debt cycles; mental health issues; some faced eviction
Society	Increased poverty; cost to public services
Shareholders	Initially high returns, then total loss
Employees	350 jobs lost; moral discomfort with model

Multinational Case: Apple Supply Chain

Payment Terms: 60-90 days typical, with intense pressure on suppliers.

Concerns Raised:

Chinese suppliers faced cash flow pressures
Reports of worker exploitation at Foxconn
Cost pressure allegedly led to poor conditions
Suppliers afraid to negotiate

Apple's Improvements:

Annual Supplier Responsibility Reports published
Conducts facility audits
Supplier Code of Conduct
Working hours limits enforced
Worker education programs funded

Assessment: Apple now leads tech industry in supplier accountability, though power imbalance remains.

Ethical Decision-Making Framework

Key Questions to Ask:
• Is it legal?
• Is it fair to all stakeholders?
• Would I be comfortable if it became public?
• Does it align with company values?
• What are the long-term consequences?
• Am I treating others as I would wish to be treated?
• What would happen if everyone did this?

The Business Case for Ethical Behaviour:
• Reputation: Brand value depends on trust
• Customer loyalty: Ethical companies retain customers
• Employee attraction: Top talent wants ethical employers
• Risk management: Reduces regulatory/legal risks
• Investor preference: Growing ESG investment focus
• Sustainability: Extractive practices eventually fail
• Social license: Need community support to operate

Summary: Evaluating Financial Ethics

Issue	Ethical Concerns	Business Justifications	Best Practice
Tax Avoidance	Reduces services; unfair to taxpayers	Legal; duty to shareholders	Pay fair share; transparent strategy
Supplier Terms	Cash strain; power exploitation	Industry standard; improves cash flow	Fair 30-60 day terms; partnership approach
Customer Credit	Exploitation; debt traps	Risk-based pricing; market demand	Responsible lending; transparent terms

Practice Scenarios

Test your ability to calculate and interpret financial ratios. Each scenario generates randomised UK business data — read carefully and show your working.

Score: 0 / 0 | 0%

Tips: Enter numbers only — no £ signs or % symbols. Round to 2 decimal places. For ratios, give the answer as a decimal (e.g. 1.75 not 1.75:1).