2.3 Flashcards
Gross profit
Profit after deducting costs of making/selling a product
= Revenue - cost of sales
GPM = (Gross profit/revenue) x100
Net profit
Amount left after interest is taken from operating profit
=Total revenue - total expenses
NPM = (net profit/revenue) x100
Operating profit
Amount left after expenses are taken from gross profit
= Gross profit - expenses
Difference between cash and profit
Not all cash paid into a business is profit . A business must pay its costs from the money that comes into it. Once all costs have been deducted from all revenue , the amount that is left is the business’ profit
Liquidity
Liquidity: Ability of a business to pay it’s debts and liabilities when due
How to improve:
- Use effective overdraft
- Negotiate additional short term loans
- Credit agreements with suppliers
Current assets: Owned for less than a year
Non-current assets: Owned for a year +
Working capital = Asset liabilities - current liabilities
Value of business = Total assets - Total liabilities
Current ratio = Current assets/current liabilities
Profit and revenue
Fixed costs: Paid regardless of sales e.g. rent/salary
Variable costs: Changes as output changes
= cost per unit x units sold
How to increase profit:
- Increase revenue
- Decrease costs
Operating profit
Profit before taking account for taxes
Total equity
Profit left in the company after subtracting total liabilities from total assets
Calculation = Total assets - total liabilities
Reserves
Profits that are kept for a specific reason
Capital employed
The total amount of capital used for the acquisition of profits
Calculation = (fixed + current assets) - current liabilities
(higher % = better)
Statement of comprehensive income
A financial document showing a company’s income and expenditure over a particular time period, usually one year
Statement of financial position
A summary at a particular point in time of the value of a firm’s assets, liabilities and capital
Current ratio
Assesses whether or not a business has enough resources to meet any debts that arise in the next 12 months
Acid test ratio
Similar to the current ratio but excludes stocks for current assets. A more severe test of liquidity.
Shareholder’s equity
The amount of money owed by the business to the shareholders
External factors for failure
Factors beyond the control of businesses cause it to collapse
Internal factors for failure
Factors that business are able to control cause it to collapse
Overtrading
The situation where a business does not have enough cash to support its production and sales, usually because it is growing too fast
