2.3 Flashcards
Definition of Gross Profit
The difference between revenue and costs of production
Formula of Gross Profit
Revenue - Cost of Sales
Definition of Operating Profit
The difference between gross profit and indirect expenses involved
Formula of Operating Profit
Gross Profit - Operating Expenses
Definition of Net Profit
The difference of operating profit and any interest paid and received or one-off costs
Formula of Net Profit
Operating Profit - (Net interest + Exceptional Costs)
What is a Statement of Comprehensive Income used for
-Shows income and expenses over 12 months
-All profit is calculated within
Definition of Profit Margin
The amount which sales revenue exceed costs
Definition of Gross Profit Margin
The proportion of revenue that is turned into gross profit
Formula of Gross Profit Margin
(Gross Profit / Revenue ) *100
Definition of Operating Profit Margin
The proportion of revenue that is turned into operating profit
Formula of Operating Profit Margin
(Operating Profit / Revenue) *100
Definition of Net Profit Margin
The proportion of revenue that is turned into net profit before tax
Formula of Net Profit Margin
(Net Profit / Revenue) * 100
4 Ways to improve Profitability
-Increase Prices
-Reduce Expenses
-Reduce One-off Costs and Interest
-Reduce Variable Costs
Definition of Profit
The difference between revenue generated and business costs
Definition of Cash
The full range of money flowing in and out of a business
What is the Statement of Financial Position used for
Draw conclusions about the liquidity of the business
Definition of Liquidity
The ease and cost that assets can be turned into cash to cover short term commitments (current liabilities)
Definition of Non Current Assets
Items that are owned by the business for the long term
Machinery, Buildings
Definition of Current Assets
Items that are converted to cash quickly
Cash, Inventory, Trade Receivables
Definition of Current Liabilities
Money that is owed and will be settled soon Trade Payables, Short Term Borrowing (Bank Overdraft)
Definition of Non Current Liabilities
Money that is owed but doesn’t need to be settled for at least 12 months
Bank Loans, Mortgages
Formula of Net Assets (Capital Employed)
Assets - Liabilities
Definition of Current Ratio
A way to measure liquidity
£s of current assets to cover £1 of short term debt
Formula of Current Ratio
Current Assets / Current Liabilities
? : 1
Definition of Acid Test Ratio
A way to measure liquidity
£s of current assets to cover £1 of short term debt
Takes away inventory
Formula of Acid Test Ratio
Current Assets - Inventory / Current Liabilities
? : 1
6 Ways to Improve Liquidity
-Reduce Credit Period for customers
-Ask supplier for extended repayments
-Make use of overdraft or short term loan
-Sell of excess stock
-Sell assets and lease fixed assets
-Introduce new capital and reduce drawings
Definition of Working Capital
The money that a business has to fund its day to day activities
Can be called Net Current Assets
Formula of Working Capital
Current Assets - Current Liabilities
5 Internal Reasons for Business Failure
-Poor Planning
-Lack of Leadership
-Ineffective Marketing
-Cash Flow Problems
-Lack of Funds
5 External Reasons for Business Failure
-Economic Challenges
-Changes in Consumer Tastes
-Legal Factors
-Market Challenges
-Technological Change
