2.3 Flashcards
Profit formula
Total Revenue - Total Costs
Revenue formula
Selling Price x Quantity Sold
Total Cost formula
fixed costs + variable costs
Variable cost formula
variable cost per unit x quantity
Which type of profit is favoured by entrepreneurs when they are trying to get investment because it over estimates the profit you have
Gross profit
Which type of profit includes the overheads/expenses that the business has to pay
Operating profit
Which profit is the true profit that is reported to Inland Revenue to calcualte the level of tax that is due
Net profit
Gross profit formula
Revenue - cost of sales
Operating profit formula
Gross profit - operating expenses
Net profit formula
Operating profit - interest and other expenses
What does the Profit and Loss Account show
The income and expenses of the business during the year
And will always shows the figures for the current year and previous year
Purpose of the Profit and Loss Account
Show whether a business has made a profit or loss
Describe how the profit or loss arose
What does the Trading Account show
Shows the income from sales and the direct costs of making those sales
Definition of Overheads and expenses
Costs not directly involved in the production process
Why are Profit percentages used
To see how profitable a business
Measures how much profit is made from the revenue that the business makes
Why are Market share percentages used
To see how powerful a business is in their market
What is ratio analysis
Analysing and comparing performance of a business to help suggest strategies to improve performance of a business
Gross profit margin formula
Gross profit / revenue x 100
Operating profit margin formula
Operating profit / revenue x 100
Net profit margin formula
Net profit / revenue x 100
What are the two main ways to improve profitability
Increasing revenue
Lowering cost
Asset definition
Resoruces owned by a business that have value
Liabilities definition
The debts of the business
Capital definition
Money put into the business
Other sources of finance
Used to buy assets
Machinary / make assets/goods
What is the Balance Sheet / Statement of Financial Position
Summary of the assets , liabilities and capital of a business
Current assets definiton
Assets changed into cash within one year
Non current asset definition
Assets that will will be used repeatedly over a period of time
Current liabilities
Debts due within one year
Non current liabilities
Debts that do not have to be paid for at least one year
Tangible assets
Assets which a business physcially owns and can touch e.g. the product , building etc
Non tangible assets
Assets which a business owns but they aren’t physical e.g. the brand etc
Net assets formula
Total Assets - Total Liabilities
Assets formula
Liabilities + Equity
Liquidity definition
How quickly something can be turned into cash
How able a business is to repay their debts using assets
Current ratio formula
Current assets / current liabilities
If current ratio is 1.5:1 - 2:1 what does this mean
that the business has plenty of working capital to meet its day to day bills
If current ratio is above 2:1 what does this mean
Too much money is tied up in assets that are not making money and aren’t being properlly invested
If current ratio is below 1.5:1 what does this mean
Could be a problem but depends of the type of business
Some issues with stock
Space
Could be perishable
Could be outdate / not in fashion anymore
Cost to hold it
Acid test ratio formula
Current assets - Inventories / Current liabilities
What does a less than 1:1 current ration mean
A business’ current assets minus stock do not cover its current liabilites #
So shows the business is too reliant on stock
Working capital definition
the capital of a business used in its day to day trading operations
What is the working capital cycle
Time taken to convert net current assets and current liabilities into cash
Often expressed as a period of time
If this length has to be increased it suggests that it takes longer to turn stocks and debtors into cash
Each time it happens a little money is put back in than flows out
Working capital formula
Current assets - Current liabilities
Why is cash important
Most liquid business asset
Part of working capital
Poor cash flow can lead to business failure
Ways to improve liquidity
Overdraft
Loans
Cash sales
Sales and leaseback
Only make essential purchases
Extend credit with suppliers
Reduce personal drawings from busines
Introduce fresh capital
External causes of business failure
Competition
Changes in legislation
Changes in consumer taste
Economic conditions
Changes in market price
Financial reasons for a business to fail
Bankrupt - legal process declaring they can no longer pay debts
Insolvent - can’t pay debts
Shortage of cash
Non-financial reason for a business to fail
Lack of planning
Lack of business skills
Inability to compete efficiently
Failure to meet customer needs
What can casue cash flow problems
Overtrading
Investing too much in fixed assets
Allowing too much credit
Over borrowing
Seasonal factors
Unforeseen expenditure
External factors - consumer taste legalisation
Poor financial management
