2.3 Managing Finance Flashcards
Define ‘profit’
Profit is the money left over after all costs have been accounted for
What are the 3 different types of profit?
Gross Profit
Operating Profit
Net Profit
What is gross profit?
The difference between revenue and the costs directly related to production
What is operating profit?
The difference between the gross profit and the indirect expenses involved in operating the business
What is net profit?
The difference between the operating profit and any interest paid and recieved, as well as many one off costs
What is the formula for gross profit?
Revenue - Costs of sales
What is the formula for operating profit?
Gross Profit - Operating Expenses
What is the formula for net profit?
Operating Profit - (net interest + exeptional costs)
What’s the formula for profit of the year after tax?
Profit for the year - Tax
What is a profit margin?
The amount by which the sales revenue exceeds the costs
How do you work out the gross profit margin?
Gross profit/Revenue X100
How do you calculate the operating profit margin?
Operating Profit/Revenue X100
How do you calculate the net profit margin?
Profit for the year/Revenue X100
What ways are there to improve profitability?
- Increase Prices
- Reduce variable costs
- Reduce expenses
- Reduce one-off costs and interests
Define liquidity in a business?
The ability of a business to meet its short term commitments (e.g. payments to its creditors ) with its avaliable assests
Managing liquidity is a key way to manage risk in a business - and helps a business to prepare for the unexpected
What is a balance sheet?
(Statement of financial position)
Contains the financial information required to draw conclusions about the liquidity of the business
What is in the statement of financial position?
Shows the financial structure of a business at a specific point in time
It identifies a businesses assets and liabilities and specifies the capital (money) used to fund the business
What is the formula for current ratio?
Current Assests/Current Liabilities
?:1
What is the formula for the acid test?
Current Assets - Inventory / Current Liabilitys
?:1
What ways are there to improve liquidity?
Reduce the credit period offered to customers - Collecting money owed from customers more quickly will increase the level of current assets in the business
Ask suppliers for an extended repayment period e.g an extension from 60 to 90 days
Sell off excess stock- Less liquid current assets will be reduced and converted into more liquid forms of current asset (e.g. cash)
Storage and security costs may also be reduced
Define ‘Working Capital’.
- Working capital is the money that a business has to fund its day to day activities
- It is often described as net current assets on the Statement of Financial Position
What is the formula for working capital?
Current Assets- Current Liabilities
What are some internal causes of business failure?
Poor planning-Ineffective business plan,poor budgeting, lack of research & development
Lack of leadership-Poor decision making,Lack of urgency
Ineffective marketing-Not enough/inapropriate market research
Lack of funds-Failure to attract investment
What are some external causes of business failure?
Economic challanges- Business failure tends to increase in periods of recession due to reduced demand, rising interest rates
Changes in consumer tastes- The need for frequent market research increases costs
Legal factors Market challanges- Products or assets may need to be redesigned or replaced to meet changed legal standard
