2.3 - Managing Finance Flashcards
What is the formula for gross profit?
Gross profit = sales revenue - cost of goods sold
What is the formula for operating profit?
Gross profit - operating expenses
What is the formula for profit for the year (net profit)
Profit for the year (net profit ) = Operating profit - interest
What is the formula for gross profit margin?
Gross profit / sales revenue (x100)
What is the formula for operating profit margin?
Operating profit / revenue (x100)
What is the formula for net profit margin?
Net profit (before tax) / revenue (x100)
What is a statement of comprehensive income (profit and loss account)?
A statement showing the income and expenses of a business during the financial year. It is used to calculate gross profit, operating profit and profit for the year (net profit)
What are someways a business can improve its profitability?
- raising prices - more revenue for every unit sold, if costs remain the same then profitability should improve
- lowering costs - can be done by buying cheaper resources or using existing resources more efficeintly
What is a statement of financial position?
A document that provides a summary of its assets, liabilities and capital.
What is an assest?
- The resources owned by a business. E.g. machinery, equipments, vehicles, stock and cash.
What are liabilities?
The debts of the business, in other words what it owes to others. They can be short term e.g. overdrafts or long term e.g. mortgage
What is capital?
The money put into the business by the owners, along with other sources of finance it is used to buy assets.
What are non-current assets?
Long-term resources that will be used repeatedly by the business over a period of time. E.g. land, property, equipment. Can also be intangible e.g. brand names
What are current assets?
Assets that will be changed into cash within 12 months. They are liquid assets.
What is meant by liquidity?
The liquidity of an asset is how easily it can be converted into cash. E.g. inventories
What are current liabilities?
Any money owed by a business that must be repaid within one year. E.g. short term loans for example overdrafts
What are non-current liabilities?
Long term loans and any other money owed by the business that does not have to be repaid for at least one year. E.g. long term loans, mortgages.
What is the formula for current ratio?
Current ratio = current assets / current liabilities
What is the formula for acid test ratio?
Acid test ratio = current assets - inventories / current liabilities
What is working capital? Why does a business need working capital?
The amount of money needed to pay for the day-to-day trading of a business. A business needs working capital to pay expenses such as wages, electricity and gas charges.
What is the formula for working capital?
Working capital = current assets - current liabilities
What are some ways to improve liquidity?
- use overdraft facilities
- negotiate additional short-term or long-term loans
- encourage cash sales and sell off stocks
- only make essential purchases
What are some internal causes of business failure?
- lack of planning - new businesses may overlook the importance of planning, including financial planning, therefore a thorough business plan is needed to provide clarity
- cash flow problems e.g. external factors, seasonal factors, poor financial management, over trading
- lack of funds
- narrow customer base
What are some external causes of business failure?
- competition
- changes in legislation e.g. new laws
- changes in consumer tastes
- economic conditions e.g. recessions, interest rates, exchange rates
What are financial causes of business failure?
- businesses may become bankrupt (taken to court by creditors) or insolvent (where they cease trading of their own accord)
- the most common reason for this failure is shortage of cash, meaning the business would not be able to pay immediate debts
What are non-financial causes of business failure?
- lack of planning
- lack of business skills
- inability to compete effectively
- failure to meet customer needs
