2.3 Managing Finance Flashcards
ways to improve profitability:
- reducing costs
- increasing turnover
- increasing productivity
- reduce product range
- outsource non-essential functions
difference between cash and profit
cash shows how much money moves in and out of your business, while profit illustrates how much money is left after the expense have been paid
improving profitability
reduce product range
- business often have too many products = complex operations & inefficiency
- products may be low margin or even loss-making
improving profitability
outsource non-essential functions
- way of reducing fixed costs
- focus on business on what it is good at
- areas to outsource, IT, finance
profit definition
the reward or return for taking risks and making investments
what is profit in absolute terms
the £ value of profits earned
what is profit in relative terms
profit earned as a proportion of sales achieved or investment made
gross profit equation
revenues - cost of sales
operating profit equation
gross profit - expense & overheads
gross profit margin equation
gross profit / sales revenue x 100
operating profit margin equation
operating profit / sales revenue x 100
net profit equation
operating profit - finance expenses - tax
net profit margin equation
net profit/ sales revenue x 100
what is the statment of financial positon also known as
balanced sheet
what is a balance sheet
shows the financial position of a firm on a given day. what it owns (assets) and what it owes (liabilities). its a snapshot of the business and is used by investors to see if its worth investing in
what are non-current assets
create revenue and allows them to make profits. they are kept by the business for more than a year
e.g. vehicles, machinery
what are current assets
firms will keep them for a short time (less than a year) they area able to be turned to cash within a year
e.g. inventories (stocks), receivables (debtors)
what are liabilities
money business owes e.g. debt
what are current liabilities
debt the business will pay within a year
e.g. overdrafts, payable, tax
what are non-current liabilities
debts that the business has more than one year to repay
e.g. bank loans, mortgages
what is a liquidity ratio
asses whether a business has sufficient cash or cash equivalent current assets to be able to pay it debts as they fall due
current ratio equation
current assets / current liabilities
how to interpretate current ratios
- 1.5-2.0 suggest efficient management of working capital
- low ratio (<1) indicates cash problems
- high ratio: too much working capital
acid test ratio equation
current assets - stocks / current liabilities
interpretating acid test ratio
- <1 is bad news
- less relevant for business with high stock turnover
What are inventories?
a list of all the stock that is held by a business, it will either be used in production or sold
What are receivables?
Debt, owed to a firm by its customers for goods/services used or delivered, but not yet paid for
What are cash and cash equivalents?
Items on the balance sheet that reports the value of a company’s assets that are cash or can be converted into cash immediately
What are total current assets?
The resources that a business owns and expects to use or sell within a year
What are net current liabilities
Current assets minus current liabilities of an organisation
What are reserves/retained earnings?
Portion of a company’s net income that is kept by the company rather than being distributed as dividends
What is total equity?
Difference between a companies assets and its liabilities
What are the distribution and administration expenses?
Expenses that are necessary for normal business operations were not related to the cost of goods or sales
what is an income statement?
measure business performance over a given period of time, usually one year. It compares the income of the business against the cost of goods or services and expenses incurred in earning that revenue
what is a cash flow statement
this shows how the business has generated and disposed of cash and liquid funds during the period under review
