2.3 Managing finance Flashcards
What is profit?
The difference between the revenue of a business and the costs generated by the business during a period of time
How to calculate gross profit:
Sales revenue - (cost of sales) aka variable costs
How to calculate operating profit:
Gross profit - fixed overheads (fixed costs)
How to calculate net profit:
Operating profit - interest/tax
How to improve profit:
Increase revenue
Reduce costs
What is a statement of comprehensive income?
Produced by PLC’s showing revenue and different types of costs/profit for the year
What is profitability?
States profit as a percentage of sales revenue
How to calculate gross profit margin?
Gross profit
———————- x 100
Sales revenue
How to calculate operating profit margin?
operating profit
———————- x 100
Sales revenue
How to calculate net profit margin?
Net profit
———————- x 100
Sales revenue
Ways to improve profitability:
Increase selling price
Cut costs
What is the distinction between cash and profit:
Sales revenue does not equal cash inflows
Costs do not equal cash outflows
What is liquidity?
The ability of a business to find the cash it needs to pay it’s bills
What are the two ways in measuring liquidity?
Calculating current ratio
Calculating acid test ratio
How to calculate current ratio:
Current liabilities
How to calculate acid test ratio:
Current liabilities
How to improve liquidity:
Raising more share capital
Selling under-used fixed assets e.g machinery
Increasing long term borrowing through loans
Postponing planned investments
Reduce credit period offered to customers
What is working capital?
Money available for the day to day running of the business
What does managing the working cycle involve?
Ensuring there is enough money in the system altogether
Making sure cash moves through the cycle as quickly as possible
What does it mean if a business fails?
Means the end of trading for a business e.g BlockBuster
Why do businesses fail?
Refuse to move in time with the dynamic market
Technology has advanced
Internal causes of business failure:
Failure to understand the market
Poor planning
Poor decision making
Badly organised
Overtrading
Non viable idea in the first place
External causes of business failure:
Economic environment
Changing social trends
Demographic changes
Political environment
