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business studies > 2.3 - managing finance > Flashcards

2.3 - managing finance Flashcards

1
Q

why profit is important

A
  • unit costs
  • efficiency
  • productivity
  • break even
  • sources of finance & cash flow
  • adding value
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2
Q

gross profit

A

revenue without any associated costs of production
revenue - cost of sales

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3
Q

operating profit

A

profit made by a company after the general expenses have been paid out
gross profit - operating expenses

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4
Q

net profit

A

profit for the shareholders/business after interest has been paid
operating profit - interest costs

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5
Q

cost of sales

A

how much it costs to make a product

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6
Q

statement of comprehensive income

A
  • lays out the profit or loss for the year for a business
  • shows the figures for the current and previous trading year
  • able to make comparisons between years against competitors
  • shows the amount of profit made and breaks it down so a firm can assess the performance in different areas
  • shows the amount of tax to be paid
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7
Q

calculating profit margins

A

measure size of profit in relation to revenue/turnover

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8
Q

gross profit margin

A
  • how much gross profit was made in relation to revenue
  • percentage of revenue that was gross profit
  • gross profit/revenue x 100
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9
Q

operating profit margin

A
  • how much operating profit was made in relation to revenue
  • percentage of revenue that was operating profit
  • measures pricing strategies and efficiency
  • operating profit/revenue x 100
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10
Q

net profit margin

A
  • how much net profit was made in relation to revenue
  • percentage of revenue that was net profit
  • shows profit made on the revenue
  • takes costs into account
  • net profit/revenue x 100
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11
Q

ways to improve profitability

A
  • increase selling prices = more money into the business
  • lower costs = no spending extra money
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12
Q

assets

A

resources owned by the business
examples - buildings, machinery, equipment, stock, cash
assets = capital + liabilities

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13
Q

liabilities

A

money owed by the business (debts)
examples - overdrafts, loans, mortgages

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14
Q

capital

A

money put into the business by its owner
example - investment, share capital, retained profit

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15
Q

statement of financial position

A
  • produced at the end of the year
  • previously called the balance sheet
  • provides a summary of the business’ assets
  • should balance
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16
Q

liquidity

A
  • companies’ ability to convert assets to cash or acquire cash through a loan or bank to pay short-term obligations or liabilities
  • two ratios that measure liquidity = current ratio and acid test ratio
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17
Q

current ratio

A
  • ratio used to assess if the business has enough resources to meet any of the debts that might arise in the next 12 months
  • current ratio = current assets/current liabilities
  • sufficient liquid resources = between 1.5:1 and 2:1
  • below 1.5:1 = not enough working capital
  • above 2:1 = too much money tied up unproductively
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18
Q

acid test ratio

A
  • used to assess if the business has enough resources to meet any of the debts that might arise in the next 12 months, excludes stock from current assets
  • acid test ratio = current assets - inventories (stock)/current liabilities
  • good acid test = greater than 1
  • less than 1 = current assets minus stocks don’t cover current liabilities
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19
Q

working capital

A
  • amount of money needed to pay for day-to-day trading of the business
  • money left over after all current debts have been paid
  • working capital = current assets - current liabilities
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20
Q

where current assets are

A

liquid assets that are easily changed to cash

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21
Q

where liabilities are

A

owed, needed to pay short term

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22
Q

managing large working capital

A
  • large businesses need large working capital for stock
  • hold large stock levels
  • buy stock on trade credit, and wait a long time before paying
23
Q

managing small working capital

A
  • adopt just-in-time techniques
  • supermarkets have negative working capital, buy stock and don’t repay until 30 days but sell the stock before then
24
Q

keeping too little working capital

A
  • not enough raw materials to fulfill production
  • not enough cash in the business to pay bills on time
  • if it has borrowed too much on trade credit, it owes too much and may be unable to pay invoices
25
Q

keeping too much working capital

A
  • keeping a large amount of costly stocks, expensive to store, insure, and liable to shrinkage
  • too much cash in the business which is not earning interest, being used to pay debts, or invest
26
Q

internal causes of business failure

A
  • lack of planning
  • cash flow problems
  • lack of funds
  • relying on narrow customer base
  • marketing problems
  • failure to innovate
  • lack of business skills
27
Q

external causes of business failure

A
  • competition
  • changes in legislation
  • changes in consumer taste
  • economic conditions
  • changes in market prices
28
Q

non-current assets

A

items of value owned by the business
stay within the business for more than a year

29
Q

tangible assets

A

items of value owned by the business
stay within the business for more than a year
can be touched

30
Q

intangible assets

A

items of value owned by the business
stay within the business for more than a year
cannot be touched

31
Q

current assets

A

items of value owned by a business
value is likely to fluctuate on a regular basis

32
Q

current liabilities

A

something owed by the business
paid back in under a year

33
Q

net current assets/liabilities

A

figure that represents the total value of all assets minus the value of liabilities

34
Q

non-current liabilities

A

something the business owes
paid back in more than a year

35
Q

net assets

A

represents the business’s ability to meet short-term debts
also called working capital

36
Q

liability

A

something a person or business owes, usually a sum of money
examples - loan, mortgage, credit card

37
Q

unlimited liability

A

owners of a business are personally liable for the debts of the business
sole traders and partnerships

38
Q

limited liability

A

if a business fails the owners will only lose the money they have invested in the business to pay off any debts

39
Q

adverse

A

spending more than the budget

40
Q

favourable

A

spending less than the amount budgeted

41
Q

sole trader

A
  • one owner
  • most common
  • employ people
  • owns all assets
  • unlimited liability
42
Q

advantages of a sole trader

A
  • control over the business
  • keep profits
  • unlimited liability
  • easy to set up
  • small capital to set up
  • easier to control
43
Q

disadvantages of a sole trader

A
  • business is owner
  • hard to raise finance
  • holidays
  • full liability
  • more tax
44
Q

partnership

A
  • multiple owners (2-20)
  • share assets & debts
  • unlimited liabilities
  • legal agreements
  • owe liabilities between them
45
Q

advantages of partnerships

A
  • start-up capital
  • easy to set up
  • share knowledge
  • shared skills
  • finance potential
46
Q

disadvantages of partnerships

A
  • disagreements
  • personal liability
  • decisions
  • raising finance
  • partners honor decisions
47
Q

implications of unlimited liability

A
  • risky for business owners
  • owners can lose personal possessions
  • less costly, less paperwork
48
Q

public limited company

A

offers shares to public (shareholders) stock market

49
Q

private limited company

A

owned by shareholders
ownership divided into shares
shares not available to the public

50
Q

advantages of a private limited company

A
  • more access to capital
  • limited liability
  • more knowledge
51
Q

disadvantages of a private limited company

A
  • costly
  • accounts published
  • loss of control
52
Q

advantages of a public limited company

A
  • more capital
  • limited liability
  • increased negotiation opportunities
53
Q

disadvantages of a public limited company

A
  • costly
  • accounts published
  • risk of turnover
54
Q

implications of limited liability

A
  • confidence to push the business to the next level
  • less threatening to family well-being
  • scope for fraud

business studies (16 decks)

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