2.3 Managing finance Flashcards
what are the 3 types of profit
gross profit
operating profit
net profit
what can profit figures tell you about a business
gp = the higher the better - can be compared annually or between departments
np = higher is better and demonstrates how well a business is controlling their expenses
calculate gross profit
sales revenue - cogs
gp margin
gp / sales revenue x 100
operating profit
gp - expenses
operating profit margin
op / sales revenue x 100
net profit
op - interest
net profit margin
net profit / sales revenue x 100
what is an income statement
= measures the businesses performance over a given time period
- financial document showing company revenue
which stakeholders are interested in a businesses P&L
shareholders - final profit figure/dividends
investors - want to know the profitability
employees and managers - may wish to know the expenses of the business
ways to improve profitability
risky strategy, raise prices
- although this may impact sales and demand may fall dependent on elastacity
move production to NEE, redundancies, buy cheaper raw materials, upgrade machinery
profit vs cash
profit - recorded straight awat, can trade without profit, must increase revenue or reduce costs sp improve
cash = will not be recorded until it is paid out, cannot pay wages or bills without cash
define liquidity
the ability of a business to turn its assets into cash to pay its current liabilities
what is a balance sheet
- document showing what a business owns = its liabilities
- judge the financial position of the business
non current assets
non current - long term assets which are not expected to be sold within the next year of trading
e.g. intangible assets (copyright, patents, trademarks)
tangible assets - property, equipment
deffered tax assets
current assets
= likely to be turned into cash within the next year of trading
e.g. inventories, trade and other receivables, cash
non current liabilities
= debts which are not expected to be paid off within the next year of trading
e.g. borrowings, retirement benefit obligations, provision for liabilities
current liabilities
= debts which are expected to be paud within the next year of trading
e.g. borrowing, curremt tax liabilities and provision for liabilities
define equity
= value of shares issued by a company and money owed to the shareholders
accummulated losses = losses from previous years trading, which decrease the value of the equity
uses and limitations of a balance sheet
USES
- to evaluate performance and potential of a business to an investor
- summary of business
LIMITATIONS
- value of assets stated may not be same as the amount they sell for
- static snapshot
define liquidity
the ability of a business to turn its assets into cash
= indicates to an investor the ability of a business to pay its debts
how is liquidity measured
measured by calculating the current ratio and acid test ratio
current ratio
current assets / current liabilities
= also known as the working capital ratio
= 1.5:1 - 2:1 then the business has plenty of working capital to meet daily expenses
- above 2:1 = too much money tiede up in assets
- less than 1.5:1 may be a problem unless they have fast moving stock generated from cash sales
acid test ratio
current assets - stock / current liabilities
= harsher test of liquidity as you cannot guarantee to sell all stock
- less than 1:1 means they do not cover current liabilities
