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Business Theme 2 Managing business activities > 2.3 Managing Finance > Flashcards

2.3 Managing Finance Flashcards

1
Q

What does an Income statement measure?

A

Measures the business income & costs over previous year.

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2
Q

Profit Formula

A

Profit = total sales - total costs

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3
Q

3 measurements of profit

A

-Gross profit
-Operating profit
-Net profit

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4
Q

What is Gross profit formula?

A

revenue - cost of sales

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5
Q

What is ratio analysis?

A

Analysing relationships between financial data to assess the performance of a business

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6
Q

Gross profit margin formula

A

gross profit/revenue x100

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7
Q

Operating profit formula

A

Gross profit - operating expenses

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8
Q

Operating profit margin formula

A

Operating profit / revenues x100

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9
Q

What is a balance sheet ?

A

Shows the financial structure of a business and identifies the assets and liabilities and the specific capital used to fund the business.

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10
Q

Define Liquidity

A

The ability of a business to meet its short term commitments with its available assets

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11
Q

Current ratio formula

A

Current ratio = current assets/current liabilities

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12
Q

Acid ratio formula

A

Acid ratio = (Current assets - stock) / current liabilities

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13
Q

Define working capital

A

Working capital is the cash needed to pay for the day to day operation of the business

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14
Q

Working capital formula

A

working capital = current assets - current liabilities

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15
Q

Main causes of cash flow problems

A

-low profits or losses
-Too much production capacity
-Excess inventories sold
-Over trading

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16
Q

Define overtrading

A

Where a business expands too quickly putting pressure on short term finance

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17
Q

Ways to improve liquidity

A

-Reduce credit period offered to customers
-Ask suppliers for extended repayment period
-Make use of overdraft facilities
-Sell excess stock

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18
Q

What is debt factoring?

A

the selling of debtors to a third party - this generates cash but reduces income and profit

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19
Q

What is trade credit?

A

Amounts owed to suppliers for goods supplied on credit and not yet paid

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20
Q

What does a ratio of 1.5-2 suggest?

A

Efficient management of working capital

21
Q

What does a low ratio (below 1) indicate?

A

Indicates cash flow problems

22
Q

Drawbacks of stockholding?

A

Liquidity problems, to much cash ‘tied up’ in stock

23
Q

What are some internal reasons for business failure?

A

-Poor planning
-Lack of leadership, inefficient management
-Ineffective marketing
-Cash flow problems
-Lack of funds

24
Q

External causes of business failure

A

-Economic challenges
-Changes in consumer tastes
-Legal factors
-Market challenges (competitor actions)
-Technological change

25
Q

Poor planning (internal)

A

-Ineffective business plan
-Poor budgeting
-Lack of R&D
-Little innovation

26
Q

Lack of leadership/Inefficient management (Internal)

A

-Poor decision making
-Failure to delegate
-Lack of skills/experience
-Difficult to operate day to day

27
Q

Ineffective marketing (Internal)

A

-Not enough market research
-Poor understanding of customers

28
Q

Lack of funds (Internal)

A

-Failure to attract investment
-Difficulties borrowing
-Limited capital

29
Q

Net profit formula

A

Operating profit +/- finance costs

30
Q

Net profit margin formula

A

Net profit / sales revenue X100

31
Q

What are 3 ways to improve profitability?

A
  1. Increase selling price
  2. Reduce variable costs
  3. Reduce expenses
32
Q

Improving Profitability: Raising prices

A

-If costs remain same this will improve profitability
-Raising prices impacts demand so must understand PED
-Price inelastic = raising prices = increased revenue
-Price Elastic = raising prices = decreased revenue

33
Q

Improving Profitability: Reducing Variable costs

A

-Cheaper resources, buying in bulk, negotiating with suppliers
-Must ensure reducing variable costs will not have an adverse effect on quality
-Buying stock in bulk may require investment in more storage space = extra costs

34
Q

Improving Profitability: Reduce expenses

A

-Reducing staff levels, relocating to cheaper premises
-Reducing staff levels may affect staff morale & negatively affect productivity
-Relocation costs can outweigh benefits of moving to cheaper locations

35
Q

Define Cash

A

The money flowing in and out of a business

36
Q

When is a business likely to fail?

A

If it doesn’t have sufficient cash, struggle to pay suppliers and employees.

37
Q

Improving liquidity: Reduce credit period offered to customers

A

-Collecting money owed quicker will increase level of current assets in the business.
-However customers may move to competitors that offer better payment terms.

38
Q

Improving liquidity: Ask suppliers for extended repayment terms

A

-Businesses cash then use cash for other purposes
-Suppliers may be unwilling to extend credit.

39
Q

Improving liquidity: Make use of overdraft facilities

A

-Current liabilities will increase
-Businesses can spend more
-Banks may be reluctant to lend to businesses with cash flow problems

40
Q

Improving Liquidity: Sell of excess stock

A

-Less liquid assets will be reduced and converted into more liquid forms eg cash
-Storage costs may also be reduced
-Stock may need to be sold at a low price to attract sales.

41
Q

How can a business have to much working capital?

A

-If it holding large amounts of cash it is likely to be missing out on benefits of investing in its fixed assets or investments
-If a business is holding large amounts of stock it may incur extra storage costs and could use the cash ‘tied up’ in this stock for other purposes

42
Q

Which acid test is best appropriate for businesses than hold little stock?

A

Current ratio

43
Q

Which acid test is most appropriate for a business that holds large amounts of stock?

A

Acid test ratio

44
Q

How is the acid test more realisitic?

A

As it deducts stock which is the least liquid form of current assets

45
Q

Economic challenges (External business failure)

A

-Rising interest
-Recession
-Increased costs
-Exchange rates

46
Q

Changes in consumer tastes (External business failure)

A

-Need for frequent market research which increases costs

47
Q

Market challenges (External business failure)

A

-Competitor actions
-Prices

48
Q

What other reasons are there for business failure beyond a businesses control?

A

-Changes in legislation
-Economic challenges
-Entry of new competition

Business Theme 2 Managing business activities (6 decks)

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