2.3 Managing finance Flashcards
What is gross profit
shows what is left after taking away the costs directly involved in making product/ providing service
Give the formula for gross profit
gross profit = total revenue - cost of sales
What is cost of sales
costs directly associated with making a product (e.g. materials)
What is profit
difference between revenue of a business and costs generated by business during a period of time
Give the formula for operating profit
operating profit = gross profit - fixed overheads
Give the formula for operating profit
operating profit = gross profit - fixed overheads
Give the formula for net profit (profit for the year)
net profit = operating profit - (net financing cost and corporation tax)
What is net financing cost
income from interest on bank deposits
Name 2 ways a business can improve profit
-increase revenue
-reduce costs
-
Give the formula for profit
profit = total revenue - total costs
What is a statement of comprehensive income
document produced by public limited companies that shows revenue, break-down of different types of cost, different types of profit for a year
What is profitability
states profit as a % of sales revenue
What is gross profit margin
shows gross profit as a % of sales revenue
Give the formula for gross profit margin
gross profit margin = gross profit/ sales revenue x100
Give the formula for operating profit margin
operating profit margin = operating profit/ sales revenue x100
Give the formula for gross profit margin
gross profit margin = gross profit/ sales revenue x100
Give the formula for net profit margin
net profit margin = profit for year (net profit)/ sales revenue x100
Name 2 ways to improve profitability
- increase selling price
- cut costs
What is ratio analysis
form of analysis used to obtain quick indication of a firms financial performance in profitbaility, liquidity, efficiency
What is liquidity
a businesses ability to pay day to day debts
What is ratio analysis
analysis- indicatess financial performance in profitability, liquidity, efficiency
What is a statement of comprehensive income
document produced by public limited companies- shows revenue, break-down of types of cost & types of profit for year
What is a statement of financial position
a snapshot of the businesses assets (owns and owes) and liabilities (owes) on particular day
What is a cash flow statement
shows how business has generated and disposed of cash (inflows and outflows) and liquid funds during period under review
Give the formula for current ratio
current ratio = current assets/ current liabilities
What does the measuring of liquidity involved
comparing value of current assets with current liabilities that need to be paid
-can be done through:
calculating current ratio
-ca;culatijng acid test ratio
Give the formula for acid test ratio
acid test ration = (total current assets - stock)/ current liabilities
What does improving liquidity involve
brinign extra cash onto balance sheet
Name the 5 componenets of the statement of fiancial position/ balance sheet
- current assets/ non-current assets
- current liabilities/ non-current liabilities
- net current assets
- net assets employed
- net capital employed
What are current assets
items business owns short term- in form of cash/ can easily be turned into cash
-examples: cash, money owed by customers, inventory
What are non current assets
items business owns long term- full value won’t be recognised until at least a year
-examples: land, proerpty
What are current liabilities
- debts owed by business in short term
- examples: trade creditors, overdrafts
What are non current liabilities
debts owed by business in long-term
-examples: loans, mortgages
What are fixed assets
items owned by business- used over and over to generate profit (property, machinery)
What are net current assets
-give the formula for net current assets
diff between company’s current assets (cash, stocki) & current liabilities- (accounts payable, debts.)
net current assets = current assets - current liabilities
What are net assets employed
net assets employed = non-current assets + net current assets
What are net capital employed
net capital employed = non-current liabilities + total share holder’s equity
What is working capital
money avaliable for the day-to-day running of the business
Describe the diagram of the different stages through which the working capital passes a business by
- buy materials
- produce goods
- capital injected into business
- sell to customers on credit
- customers (debtors) pay up
Name 5 main reasons why businesses fail
- not really understanding consumers
- failure to differentiate from rivals
- failing to communicate what is special about product/ service to consumers
- poor leadership
- not being able to find enough ways to generate revenue
Name 3 internal causes of business failure
- marketing failure- problems understanding changes in marketplace/ what customers are rlly looking for
- financial failure- finance should be managed- cash flow issues could occur
- systems/ operational failure- things start going wrong if IT systems dont provide business with correct info
Name 4 external causes of business failure
- changes in technology- technical advancements can destroy companies sales- products struggle to compete
- new competitors- new rival entering market- large effect on a business
- economic change- economic downturn- luxury goods dry up- businesses may find it hard to continue operating
- behaviour of banks- failure to supply credit to businesses/ forcing businesses to accept high interest rates- failure
Why may increasing selling price not improve profitability
- as whilst ^ in price- ^ profit margin- ^ in price -> fall in sales volume
- for price elastic products- increasing price -> reduces profits
Why do you have to ensure there is always enough working capital
ensure money is avaliable for day-day running of business
- preventing blockages/ delays
- ensuring successful financial management
Name 2 ways you can manage working capital
- ensuring enough money is in the system
- making sure cash moves through cycle asap
What 2 actions do financial managers consider when ensuring there is enough working capital
- control cash used- sell products asap, reducing stock
- minimise spending on fixed assets- leasing
