2.3 - Managing Finance Flashcards
Profit
Money left over after all costs have been accounted for
Gross profit (GP)
Difference between revenue and the costs directly related to output.
GP = revenue - cost of sales.
Operating profit (OP)
Difference between the gross profit and indirect expenses involved in business operation.
OP = GP - Operating expenses.
Indirect expenses
Business overheads not related to output, such as salaries, rent and selling costs.
Net profit (NP)
Difference between the OP and any interest paid.
As well as any one-off costs.
NP = OP - (net interest + one-off costs)
Interest
The cost of borrowing, the reward of saving.
Profit of comprehensive income
End of year financial statement showing all business income and expenses.
Profit margin
The amount by which the sales revenue exceeds costs.
Gross profit margin
Proportion of revenue turned into gross profit as a %.
(Gross profit/revenue) x100
Operating profit margin
Proportion of revenue that is turned into operating profit as a %.
(operating profit/revenue) x100
Net profit margin
Proportion of revenue that is turned into net profit before tax, as a %.
(Profit for the year/revenue) x100
4 ways to improve profitability
Reduce variable costs
Reduce expenses
Increase prices
Reduce one-off costs and interest.
Statement of financial position (balance sheet)
Contains the financial information required to draw conclusions of business liquidity.
Contains assets and liabilities.
Liquidity
The ability of a business to meet its short term commitments.
Assets
Resources such as machinery owned and used by a business to generate output.
Liabilities
A debt which has to be repaid.
Non-current assets
Items owned by a business for the long-term.
e.g. machinery and buildings
Current assets
Items that are converted to cash quickly.
Current liabilities
Money a business owes and is due to be settled soon.
Non-current liabilities
Money a business owes and that does not need to be paid back before 12 months.
Net assets
Assets - liabilities.
Statement of financial position (balance sheet) e.g.
2 ways to measure liquidity
Current ratio and acid test ratio.
Current ratio
Current assets/current liabilities.
Expressed as a ratio
? : 1
Acid test ratio
(current assets - inventory)/current liabilities
?:1
3 ways to improve liquidity
Use cash flow forecasts to identify potential issues before they arise.
Budget effectively, use zero budgeting.
Set clear financial objectives and look for ways to reduce costs and increase income wherever possible.
Working capital
Current assets - current liabilities.
internal causes of business failure
Poor planning, lack of leadership, ineffective marketing, cash flow problems, lack of funds.
External causes of business failure
Economic challenges, changes in consumer tastes, legal factors, market challenges, technological change.
