2.3 Managing finance Flashcards
What is cost of sales?
The cost of inventory bought or produced
How is gross profit calculated?
Gross profit = Revenue - Cost of sales
How is operating profit calculated?
Operating profit = Gross profit - Operating expenses
How do you calculate profit for the year?
Profit for the year = Operating profit - Interest
What does a statement of comprehensive income show?
The income and expenses of a business during the financial year
What is a statement of comprehensive income used for?
It is used to calculate gross profit, operating profit and profit for the year
How do you measure profitability?
By calculating profit margins, which measure the size of profit in relation to revenue
What is gross profit margin?
It shows the gross profit made on sales revenue
How is the gross profit margin calculated?
Gross profit margin = (gross profit / revenue) x 100
What does a higher gross profit margin show?
It means that more gross profit is being made per £1 of sales
How can the gross profit margin be increased?
- By raising the revenue relative to the cost of sales, by increasing price
- By cutting the cost of sales, by finding cheaper suppliers
What is operating profit margin?
It shows the operating profit made on sales revenue
What is the operating profit margin used for?
To measure a company’s pricing strategy and operating efficiency
How is the operating profit margin calculated?
Operating profit margin = (Operating profit / Revenue) x 100
What is net profit margin?
It takes into account all business costs, including interest, other non operating costs and exceptional items
How is the net profit margin calculated?
Net profit margin = (Net profit before tax / Revenue) x 100
Are high or low profit margins preferred?
Higher margins are usually better than lower ones because more money is made on each £1 of sales
What will increasing profit margins do?
It will improve business performance. If margins can be raised, the business will make more profit at the existing level of sales.
How can profit margins be raised?
• Raising prices
• Lowering costs
How will raising prices improve profitability?
If a business raises its price it will get more revenue for every unit sold. If costs remain the same then profitability should improve.
How is raising prices a risky thing to do?
It might have an impact on the level of sales as demand will fall. Also it is never certain how competitors will react.
How will lowering costs improve profitability?
It might be possible to buy resources from new suppliers that offer better prices. Or make better use of current resources to improve efficiency. However, if doing this businesses should be cautious and understand pitfalls.
What is a statement of financial position?
It is like a photograph of the financial position of a business at a particular point in time, usually produced at the end of a financial year
What is an asset?
The resources owned by a business. Examples include buildings, machinery, equipment etc.