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Business > (2.3) Managing Finance > Flashcards

(2.3) Managing Finance Flashcards

1
Q

What is the formula for Gross Profit?

A

Revenue - Cost of sales

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2
Q

What is the formula for Operating Profit?

A

Gross profit - Operating expenses

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3
Q

What is the formula for Net Profit (profit for the year)?

A

Operating profit - interest (and exceptional costs)

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4
Q

What is the formula for Gross/ operating/ net profit margin?

A

(Gross Profit / Revenue) * 100

For the others just replace gross profit with the others

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5
Q

What’s the difference between cash and profit?

A

Cash - Money that you have currently available

Profit - Money leftover after all expenses are paid

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6
Q

How might a business lower it’s costs?

A
  • Buy cheaper resources

- Using existing resources more efficiently

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7
Q

How can you improve profitability?

A
  • Raise prices

- Lower costs

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8
Q

What is a statement of comprehensive income?

A

A financial document showing a company’s income and expenses over a set time period. Used to calculate gross, operating and net profit.

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9
Q

What is the formula for current ratio?

A

Current assets/ Current liabilities

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10
Q

What does the current ratio mean?

A

Tells us how effectively a business is using its working capital

A ratio between 1.5 and 2 is good

Ratio < 1 - cash problems
Ratio > 2 - too much working capital

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11
Q

What is the statement of financial position (balance sheet)?

A

A summary of a businesses assets, liabilities and capital.

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12
Q

What can we find out from a statement of financial position?

A
  • The value of a business
  • The current assets a business holds
  • Short-term liabilities the business will need to pay within a year
  • The liquidity of a business
  • The long term debts of a business
  • How a business has been financed
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13
Q

What is the acid test ratio formula?

A

(Current assets - Inventories) / Current liabilities

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14
Q

What does the Acid test ratio mean?

A

How quickly a business can pay off its liabilities.

A high acid test indicates the company can meet immediate payments

Acid test < 1 - Not good

Acid test >= 1 is good

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15
Q

What is working capital?

A

The amount of money required to pay for the day to day trading of the business

E.g. a business needs working capital to pay expenses such as wages, utilities, raw materials

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16
Q

What is the formula for working capital?

A

Current assets - Current liabilities

17
Q

How can you improve liquidity?

A

Use of overdraft facilities - good to sort short term
Negotiate additional short term or long term loans
Reduce personal drawings from the business
Only make essential purchases - eg zero based budgeting
Trade credit -
Sell off stock -
Introduce fresh capital - eg shareholders
Encourage cash sales - encouraging customers to purchase goods in cash and not in credit
Sale and leaseback - selling a fixed asset and then leasing it back afterwards

18
Q

Why is cash important?

A

Without cash the business wouldn’t exist. They would fail to pay off their loans and any bills they have.

19
Q

What does it mean if a business have too much working capital?

A

They don’t use the extra money to grow or improve the business

20
Q

What are some internal causes of business failure?

A 
Lack of planning - 
Cash flow problems - running out of cash
Lack of funds
Relying on a narrow customer base 
Marketing problems
Failure to improve
Lack of business skills
Poor leadership
21
Q

What are some external causes of business failure?

A 
Competition
Changes in legislation (changes in laws)
Changes in customer tastes 
Economic conditions
Changes in market prices
22
Q

What are some examples of cash flow problems?

A 
Overtrading
Investing too much in fixed assets 
Allowing too much credit
Over-borrowing 
Seasonal factors
Unforeseen expenditure (I.e. equipment breakdowns)
External factors
Poor financial management
23
Q

What are some financial and non financial factors of business failure?

A

Financial
-Bankrupt because of a shortage of cash

Non-Financial

  • Lack of planning
  • Lack of skills
  • Cant compete effectively
  • Cant meet customers needs
  • Reluctant to change
  • Adverse economic conditions
24
Q

What is liquidity?

A

Liquidity refers to the day to day cash flow

25
Q

What is administration?

A

When a failing business appoints a specialist to rescue the business or wind it up

26
Q

What is overtrading?

A

When a business does not have enough cash to support its production and sales, usually because its growing too fast

Business (30 decks)

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