(2.3) Managing Finance Flashcards
What is the formula for Gross Profit?
Revenue - Cost of sales
What is the formula for Operating Profit?
Gross profit - Operating expenses
What is the formula for Net Profit (profit for the year)?
Operating profit - interest (and exceptional costs)
What is the formula for Gross/ operating/ net profit margin?
(Gross Profit / Revenue) * 100
For the others just replace gross profit with the others
What’s the difference between cash and profit?
Cash - Money that you have currently available
Profit - Money leftover after all expenses are paid
How might a business lower it’s costs?
- Buy cheaper resources
- Using existing resources more efficiently
How can you improve profitability?
- Raise prices
- Lower costs
What is a statement of comprehensive income?
A financial document showing a company’s income and expenses over a set time period. Used to calculate gross, operating and net profit.
What is the formula for current ratio?
Current assets/ Current liabilities
What does the current ratio mean?
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
What is the statement of financial position (balance sheet)?
A summary of a businesses assets, liabilities and capital.
What can we find out from a statement of financial position?
- 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
What is the acid test ratio formula?
(Current assets - Inventories) / Current liabilities
What does the Acid test ratio mean?
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
What is working capital?
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
What is the formula for working capital?
Current assets - Current liabilities
How can you improve liquidity?
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
Why is cash important?
Without cash the business wouldn’t exist. They would fail to pay off their loans and any bills they have.
What does it mean if a business have too much working capital?
They don’t use the extra money to grow or improve the business
What are some internal causes of business failure?
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
What are some external causes of business failure?
Competition Changes in legislation (changes in laws) Changes in customer tastes Economic conditions Changes in market prices
What are some examples of cash flow problems?
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
What are some financial and non financial factors of business failure?
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
What is liquidity?
Liquidity refers to the day to day cash flow
What is administration?
When a failing business appoints a specialist to rescue the business or wind it up
What is overtrading?
When a business does not have enough cash to support its production and sales, usually because its growing too fast
