2.3 Managing Finance Flashcards
What is the formula for profit?
Profit = total revenue - total costs
What is the formula for gross profit?
Gross profit = sales revenue - cost of goods sold
What is the formula for profit for the year?
Profit for the year = operating profit + other income - other expenditure
What is a statement of comprehensive income?
Also called a profit and loss account.
Shows income and expenditure for an accounting period and the resultant profit or loss made.
What are three ways of measuring profitability?
Gross profit margin
Operating profit
Profit for the year margin
What is the formula for gross profit margin?
(Gross profit / sales revenue) x 100
What is the formula for operating profit margin?
(Operating profit / sales revenue) x 100
What is the formula for profit for the year margin?
(Profit for the year / sales revenue) x 100
What is the difference between cash-flow and profit?
Cash-flow is the difference between inflows of money and outflows.
Profit is the difference between revenue and expenditure.
Cash-flow only includes what has been received whilst profit includes expected receipts.
Why might a profitable business have cash-flow problems?
Holding large amounts of inventory
Having sales on long credit periods
Purchase of fixed assets using cash
What is liquidity?
How easy it is to convert a business’ assets into cash.
What is a statement of financial position?
Also called a balance sheet.
A snapshot of a business’s financial position at a given time.
Shows assets and liabilities.
What makes a statement of financial position balanced?
Assets = liabilities + shareholders
What are the two key ratios?
Current ratio
Acid test ratio
What is the current ratio?
Current ratio = current assets / current liabilities
What is the acid test ratio formula?
(Total current assets - inventories) / current liabilities
What is an ideal figure for current ratio?
Around 1.5:1 or 2:1
However this must be compared to previous years and other businesses
Why should the current ratio stay below 2:1?
Too much money tied up in the business and not being used effectively.
What are the implications of a current ratio below 1.5:1?
There might not be enough capital to cover bills.
What does current ratio show?
Whether debts can be paid off quickly.
How can a business improve its liquidity?
Selling fixed assets.
Raising new finance through share issues or borrowing.
Postponing planned investment.
What is working capital?
A measure of an organisation’s short-term financial health.
What is the formula for working capital?
Working capital = current assets - current liabilities
Why must working capital be managed correctly?
Too little may result in cash-flow problems.
Too much may indicate inefficiences.
What are the four stages of the working capital cycle?
Sell to customers on credit
Customers pay up
Buy materials
Produce goods
What is business failure?
Where a business ceases operations because of its inability to generate sufficient revenue to cover its expenses.
What are some internal causes of business failure?
Poor management
Marketing failure
Poor financial management
What are some external causes of business failure?
Competition
Technological change
Economic change
Inability to attain sufficient working capital
