2.3- Managing Finance Flashcards
What is liquidity?
The ability of a business to turn it’s assets into cash to pay it’s current liabilities.
What are fixed assets?
Assets that the business buy in order to use.
What are current assets?
Assets that are brought to be turned into cash within a year.
What is current liability?
Payable within 1 year.
What are examples of short term liability?
Creditors, bank overdraft.
What are examples of long term liability?
Mortgages, loans, lease.
What are dividends?
The profit that you make on shares.
What is the equation to measure liquidity?
Current ratio= Current assets/ Current liabilities
What is the equation of Acid Test Ratio?
Acid Test Ratio= CA- Inventory/ current liabilities
What is profit?
Profit is the financial gain of a business through trading and can be found by deducting expenditure from income. P= TR- TC.
What are the 3 types of profit?
- Gross profit
- Operating profit
- Net profit
What is a ‘statement of comprehensive law’?
PLC’s and Ltd’s need to publish their accounts every year, this is UK law. Part of those accounts they need to show their profit and loss, this appears in the ‘statement of comprehensive law’.
How do you work out Gross profit?
Gross profit= Sales revenue- Costs of sales
How do you work out operating profit?
Operating profit= Gross profit- Expenses.
How do you work out Net profit?
Net profit= operating profit- Interest
How do you work out the gross profit margin?
Gross profit margin= (Gross profit/ sales revenue) X100
How do you work out the operating profit margin?
Operating profit margin= (operating profit/sales revenue) X100
How do you work out net profit margin?
Net profit margin= (Net profit/sales revenue) X100
How can a business improve their profitability?
Tom probe profitability a business must either increase their revenue or reduce their costs.
What are the features of Cash within a business?
- Cash will not recorded until it is paid out or received which could be in a different trading year.
- A profitability business may go bust if it runs out of cash to pay a supplier or ways of staff.
- If owners introduce cash via savings or a loan this will not affect the profit figure.
What is business failure?
Business failure is when a business ceases to trade or when a business does not trade in a profitable way or when a business makes a terrible decision.
What are 4 internal causes of business failure?
- Poor efficiency
- Poor marketing
- Failure to innovate
- Bad management of working capital
What does poor efficiency within a business entail?
An example of aggressive and disastrous expansion plans.
- Unrealistic sales forecasts can lead to over expansion.
What does poor marketing within a business entail?
- Products and businesses have to move promptly with trends/ the outside world.
- An example is a roll film business going digital.
What does poor management of working capital within a business entail?
- Working capital performance is a measure of efficiency that compares a business’ assets to it’s liabilities.
- Inability to manage cash flow is the most common reason businesses fail (not enough cash to pay bills on demand).
What are the 2 external factors that can contribute to business failure?
- Economic recession
- Strong pound (reduced export demand)
What is an economic recession and how does it contribute to business failure?
- If the economy fails to grow in 2 consecutive quarters that country will enter economic recession.
- As a country enters economic recession, customers start to save rather than buy.
- They put off decisions to purchase large expensive items.
- Some businesses will fail in recession, some with thrive.
How does the strong pound contribute to business failure?
- Strong pound means that manufacturing businesses who heavily export will be affected.
- Means that their goods/ products that they manufacture will cost their customers more.
- Some businesses shift production overseas to counter this effect but not all can afford to do this.
