2.3 Managing Finance Flashcards
What is the gp calculation?
Revenue - cost of sales (vc)
What is the op calculation?
Gross profit - fixed costs/expenses
What is the np calculation?
Operations profit - interest
What is the gp margin calculation?
Gross profit / revenue x 100
What is the op margin calculation?
Operations profit / revenue x 100
What is the np margin calculation?
Net profit / revenue x100
What is ratio Analysis?
Analysing relationships between financial data to assess the performance of a business
What is liquidity?
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 (assets) and what it owes (liabilities)
What are non current assets?
Assets not expected to be sold within the next year
What are current assets?
Short term assets - expected to be sold within the next year
What are non current liabilities?
Long term - not expected to be payed off within a year
What are current liabilities?
Short term - expected to be paid off within the next year
What is equity?
Indicates money owed to shareholders
What is the current ratio formula?
Current assets / current liabilities
What is the acid ratio formula?
Current assets - stocks / current liabilities
How to improve liquidity?
- Increase current assets
- switch to long term finance
- monitor debtors to valide bad debts
- sell assets that are no longer used
- move cash balances from current accounts to high interest accounts
What is working capital? Calculation?
A measure of a firm’s liquidity/ ability to meet day to day expenses
Current assets - current liabilities = working capital (net current assets)
More ways to improve liquidity?
- reduce stock it holds
- pay suppliers later on agreed credit
- increase borrowing long term and clear short term debts
- reduce credit period given to customers
What is business failure?
when a business ceases to trade or doesn’t trade in a profitable way or when an ineffective decision is made
What is liquidation?
The process of closing a limited company. Includes a sale of assets and the company is dissolved some retail companies sell the brand name, stock and stores and continue under diff management
What are internal reasons for business failure?
- poor efficiency
- poor marketing
- failure to innovate
- bad management of working capital
What are external reasons for business failure?
- economic recession
- strong pound - reduced export demand
- interest rates
What are financial reasons for business failure?
- poor cash flow management
- inadequate or inappropriate financing
What are non financial reasons for business failure?
- lack of management control
- significant external shock
What is poor cash flow management?
- holding too much stock
- inadequate credit control
- bad debts incurred
- inaccurate forecasts
What is inadequate financing?
- use of short term overdrafts
- failure to use debt factoring
- inadequate shareholders capital
What is lack of management control?
- failure to develop a credible business plan
- failure to understand costs
- failure to administer company properly
- excessive marketing expenditure
