2.3- Managing Finance Flashcards
What is profit and how can it be calculated?
Profit is the financial gain of a business through trading and can be found by subtracting total costs from total sales revenue.
What is a statement of comprehensive income?
- SOCI is a document that shows a PLC’s and Ltd’s profit and losses.
- In the UK it is law for PLC’s and Ltd’s to publish all their accounts every year including SOCI.
What are the 3 types of profit a business has?
- Gross
- Operating
- Net
What is the formula to calculate ‘Gross profit’?
Gross profit= Sales revenue- Cost of sales
(Cost of sales are costs that vary with output or level of sales, e.g stock)
What is the formula to calculate ‘Operating profit’?
Operating profit= Gross profit- Expenses
( Expenses are other costs to the business aside from stock, e.g advertisement)
What is the formula to calculate ‘Net profit’?
Net profit= Operating profit- interest
(Interest are payments due on loans or debts)
What is the formula to calculate ‘Gross Profit Margin’?
GP Margin= Gross profit/ Sales revenue X100
(Answer as a %)
What is the formula to calculate ‘Operating profit margin’?
OP margin= Operating profit/ Sales revenue X100
(Answer as a %)
What is the formula to calculate ‘Net profit margin’?
NP margin= Net profit/ Sales revenue X100
(Answer as a %)
What are ways that a business can increase sales revenue?
- Have a sale
- Reduce prices of products
- Increase advertisement
How can you differentiate Cash and Profit within a business?
- The profit of a business is recorded straight away, however cash will not be recorded until it is paid out or received which could be in a different trading year.
- A business can survive and trade for many years without profit, however a business can be profitable but if it runs out of cash to pay immediate costs it may go bust.
What is liquidity?
- The ability of a business to turn its assets into cash, to pay its current liabilities.
- The least liquid assets are listed at the top of he statement of financial position (e.g premises and specialist machinery, as it may take a while to sell)
- Stock would be near the bottom of the list as it is easy to sell on.
- Cash is the most liquid asset of all.
What is a statement of financial position and what does it show?
- PLC and LTD businesses have to publish their accounts every year by UK law.
- One of these accounts are called the statement of financial position.
- Shows: Non current assets, Current assets, Current liabilities, Non current liabilities and Equity/shareholder funds.
What are the two ways that a business can measure liquidity (ability to pay bills)?
- Current ratio
- Acid test ratio
What is the formula to calculate ‘Current ratio’?
Current assets/ Current liabilities
What is the formula to calculate ‘Acid test ratio’?
Current assets- Inventory/ Current liabilities
What does the Acid test conclude about a business?
- It is a harsher test of liquidity to current ratio as it doesn’t include stock as an asset as you can’t guarantee stock to be sold.
- If a business has an acid test ratio of less than 1:1 then it’s current assets do not cover it’s current liabilities and it will be a problem.
- However, some retailers with strong cash flow and fast moving stocks may have an acid test ratio of 0.4:1 and be fine, it depends on the industry.
What are ways that the liquidity of a business could be improved?
- Reduce amount of stock that it holds, so finished goods need to be dispatched faster to customers.
- Can reduce the credit period offered to customers, e.g pay within 30 days instead of 90.
- A business could agree to pay suppliers later on agreed credit terms.
What is the Working Capital of a business?
Working capital means the day-to-day finance needed in a business and can be calculated by CA- CL. (Current assets- current liabilities).
What are the 4 stages to the Working capital cycle?
- Cash
- Cash paid by debtors for goods or services brought (current asset).
- Sales
- Stock purchased from suppliers on credit (current liability)
What is business failure?
Business failure is when a business ceases to trade, when a business does not trade in a profitable way or when a business makes a terrible decision.
What are the 4 internal causes of business failure?
- Poor efficiency
- Poor marketing
- Failure to innovate
- Bad management of working capital
What are the 2 external causes of business failure?
- Economic recession
- Strong pound
What is an economic recession and how can it lead to business failure?
- As a county enters economic recession, customers start to save rather than buy.
- People put off decisions to purchase large expensive items and they also switch to buying more inferior goods.
- These buying decisions means that some businesses fail in a recession, whereas others might prosper.
What does it mean for the pound to be strong and how can it lead to business failure?
- Strong pound means that manufacturing businesses who heavily export will be affected.
- It means their goods and products that they manufacture will cost their customers more.
- Some businesses shift production overseas to counter this affect but not all can afford to do this.
- SPICED, Strong Pound Imports Cheaper Exports Dearer.
