OCR A Level Business: Measures of performance: financial and non-financial (H431) – Revision Notes

These notes condense the Measures of performance: financial and non-financial content point of the OCR A Level Business H431 specification (Version 2.1, January 2026; final assessment summer 2027). For full explanations and longer worked examples, read the study guide, then test yourself with the practice questions.

Related pages: the OCR A Level Business hub, the printable checklist, the free 10-minute diagnostics, and the wider unit revision notes and study guide.

The two families of measure

Family	Examples named in the specification	Typical strength	Typical weakness
Financial	Final accounts, ratio analysis, gearing, cash flow, budgets, variance analysis	Precise, comparable	Looks backwards; misses quality and people
Non-financial	Market share, resource utilisation, environmental impact, quality, customer satisfaction	Early warning; links to objectives	Hard to compare; does not show profit

Use both. The specification asks you to evaluate performance using financial and non-financial measures together.

Profit measures

• Gross profit: sales revenue less cost of sales.
• Operating profit: gross profit less operating expenses.
• Net profit: operating profit less finance costs (and tax, where given).

Final accounts are the income statement (trading over a period) and the statement of financial position (assets, liabilities and equity at one date).

Ratios at a glance

Standard forms (the specification does not print formulas, so state yours if a question does not).

Group	Measure	Calculation
Liquidity	Current ratio	current assets divided by current liabilities
Liquidity	Acid test	current assets less inventory, divided by current liabilities
Profitability	Gross margin	gross profit as % of sales revenue
Profitability	Net margin	net profit as % of sales revenue
Profitability	ROCE	operating profit as % of capital employed
Efficiency	Stock turnover	cost of sales divided by inventory
Efficiency	Debtor days	receivables divided by sales revenue, times 365
Solvency	Gearing	non-current liabilities as % of capital employed
Solvency	Interest cover	operating profit divided by finance costs

Method in steps

1. Write the formula before the numbers.
2. Pick the right figures (operating profit for ROCE, not net profit, unless told otherwise).
3. Calculate, then give units: %, times, days.
4. Compare: with last year, a target, or a rival.
5. Explain the cause and the consequence for a named stakeholder.
6. Judge: how serious, and what it depends on.

Worked reminder: Redwick Tiles Ltd

Sales revenue £200,000, cost of sales £120,000, operating expenses £50,000, finance costs £4,000, inventory £25,000, receivables £20,000, cash £5,000, current liabilities £30,000, non-current liabilities £75,000, capital employed £250,000.

• Gross profit £80,000, so gross margin 40.0%.
• Operating profit £30,000; net profit £26,000, so net margin 13.0%.
• Current ratio 50,000 / 30,000 = 1.67; acid test 25,000 / 30,000 = 0.83.
• ROCE 30,000 / 250,000 = 12.0%; gearing 75,000 / 250,000 = 30.0%; interest cover 30,000 / 4,000 = 7.5 times.
• Stock turnover 120,000 / 25,000 = 4.8 times; debtor days 20,000 / 200,000 x 365 = 36.5 days.

An acid test of 0.83 is below 1, so liquid assets do not fully cover current liabilities. That need not be fatal if inventory sells quickly, so say what it depends on.

Must-know distinctions

Pair	Key difference
Profit and cash flow	Profit is revenue minus costs; cash flow is money moving. Credit, inventory, depreciation and capital spending drive them apart
Cash-flow forecast and cash-flow statement	Forecast looks ahead and plans; statement records what happened
Liquidity, profitability, efficiency	Ability to pay short-term debts; return on sales or capital; use of assets and credit
Favourable and adverse variance	Favourable raises profit; adverse reduces it
Budget and variance	The plan; the gap between plan and actual
Gearing and liquidity	Long-term borrowing burden; short-term payment ability

Cash-flow problems and responses

Causes: slow-paying customers, heavy stock buying, large one-off spending, seasonal sales, falling revenue. Responses: overdraft or loan (costly, raises gearing), faster debt collection (may upset customers), longer credit from suppliers (may harm relations), delaying or leasing purchases. Judge by the size and length of the gap.

Variance rules

Revenue above budget: favourable. Costs above budget: adverse. Costs below budget: favourable. Redwick budgeted a monthly delivery cost of £18,000 and spent £19,500: a variance of £1,500 adverse. Variances show where to investigate, not the reason. Causes may be external (supplier prices) or internal (a poor budget).

Why published accounts are incomplete

• They report the past, not the future.
• They omit quality, morale, loyalty and environmental harm.
• They depend on judgements about depreciation and valuation.
• They rarely show market position or rivals.
• A year-end snapshot can hide seasonal swings.

Non-financial measures

Measure	Example indicator	Why it matters
Market share	Business sales / market sales, as % (£3.2m of £40m is 8.0%)	Shows competitive standing
Resource utilisation	Capacity used, machine hours, staff time	Spots waste or overload
Environmental impact	Waste, emissions, energy per unit	Reputation, cost, regulation
Quality	Defect and return rates	Protects reputation
Customer satisfaction	Survey scores, complaints, repeat custom	Predicts future sales
Others (etc.)	Staff turnover, delivery times	Link to people and service objectives

Why measure, and the trade-offs

Reasons: to check progress against objectives, to compare with past and rivals, to control costs, to inform decisions, to report to stakeholders. Advantages: sharper decisions, early warnings, accountability. Disadvantages: cost and time, focus on what is easy to count, short-term pressure, possible manipulation.

Stakeholder lens

Stakeholder	Likely priority measures
Shareholders	Profit margins, ROCE, returns
Lenders	Gearing, interest cover, liquidity
Employees	Pay, job security, staff turnover
Customers	Quality, satisfaction
Suppliers	Payables record, liquidity
Community	Environmental impact, local jobs

Worked reminder: cash flow against profit

In one month Redwick records sales revenue of £25,000 and running costs of £21,000, so profit is £4,000 (depreciation ignored). Customers actually pay £22,000, and the business pays £21,000 of costs plus the £6,000 van.

• Cash in £22,000, cash out £27,000, so net cash flow -£5,000.
• With £5,000 opening cash, closing cash is £0.

A profit and a zero bank balance sit side by side. The gap comes from late-paying customers and spending on a non-current asset.

Evaluating performance: a template

1. Pick the measures that fit the question’s stakeholder or objective.
2. Calculate and compare each one with a past year, a target or a rival.
3. Say what each shows and why it moved.
4. Set the financial picture against the non-financial one: do they agree?
5. Weigh the points that support success against those that suggest weakness.
6. Reach a judgement, stating what it depends on, such as the length of the trend, the reliability of the data or the business’s objectives.

A good conclusion names the single most important measure for the stakeholder in question and says why. A weak one repeats the figures.

Quick self-test

1. State one financial and one non-financial measure of performance.
2. Redwick’s cost of sales rises to £130,000 on the same revenue. Calculate the new gross margin.
3. Which is the stricter test of liquidity: current ratio or acid test?
4. Redwick spends £6,000 on a van paid in cash. Does it change profit this month?
5. Costs are £7,500 under budget. Favourable or adverse?
6. A business has sales of £3.2m in a market worth £40m. State its market share.
7. Why can a profitable business still fail?
8. Which ratio group does debtor days belong to?
9. State two limits of published accounts.
10. Name one stakeholder who would pay close attention to interest cover, and why.

Answers

1. Examples: net profit (financial); customer satisfaction score (non-financial).
2. Gross profit £70,000, so gross margin 35.0%.
3. The acid test, because it excludes inventory, which is slower to turn into cash.
4. No, apart from any depreciation charge. Cash falls by £6,000 immediately, which shows how cash and profit differ.
5. Favourable: lower cost raises profit.
6. 8.0%.
7. It may run out of cash because customers pay late or money is tied up in inventory and equipment.
8. Efficiency.
9. They are historic, and they omit non-financial matters such as quality or morale.
10. A lender or bank, because interest cover shows whether profit can meet loan interest.

Where marks are usually lost

• Giving a ratio without units, or without writing the formula.
• Describing a figure (“it went up”) with no cause or consequence.
• Using net profit when the ratio needs operating profit.
• Treating high gearing as always bad, with no mention of what it depends on.
• Confusing liquidity with profitability.
• Labelling every variance adverse.
• Listing non-financial measures with no link to the business in the case.
• Evaluating from one viewpoint only when the question names several stakeholders.
• Ending an “evaluate” answer without a reasoned judgement.

Frequently asked questions

What is the difference between liquidity and profitability? Liquidity is the ability to pay short-term debts, judged by the current ratio and acid test. Profitability is how well the business turns revenue or capital into profit, judged by margins and ROCE; confusing the two is a common error.

Which profit figure do ratios such as ROCE use? Use operating profit where the ratio needs it, as in ROCE and operating margin. Using net profit instead is a common way to lose marks.

What does interest cover show? Interest cover = operating profit ÷ finance costs, a solvency measure that shows how many times profit covers the interest the business must pay. A low figure means a fall in profit could make interest hard to meet.

Should non-financial measures be used alongside financial ones? Yes. Measures such as market share, capacity utilisation, staff turnover and emissions show what the accounts miss, but each must be linked to the business in the case.

Official syllabus

OCR Level 3 Advanced GCE in Business (H431), Version 2.1 (January 2026), OCR; section Measures of Performance: financial and non-financial, Business objectives and strategy.