2.3 managing finance Flashcards
What is profit
Money left over after all costs have been accounted for
What is gross profit
Difference between revenue and cost of sales (directly related to production)
What is the calculation for gross profit
Revenue - cost of sales
What is operating profit
difference between gross profit and operating expenses
What is the calculation for operating profit
gross profit - operating expenses
What is net profit
The amount left after deducting all expenses from sales rev
what is the formula for net profit
Sales revenue - all business expenses
What is the profit and loss account
end of year financial statement that shows all of a businesses income and expenses over twelve months
What is a profit margin
Amount by which sales revenue exceeds the costs.
higher profit margins are preferable
What is the formula for gross profit margin
( Gross profit / revenue ) *100
What is the formula for operating profit margin
(operating profit / revenue ) *100
What is the formula for net profit margin
(net profit / revenue) *100
What are ways a business can improve profitability
Increase prices
reduce expenses
reduce variable costs
reduce fixed costs
What is PED
The responsiveness of demand for a product to a change in price
What is meant by price elastic
where demand for a product changes more than the change in price
What is meant by price inelastic
demand for a product changes less than the change in price
What are two ways a business could cut variable costs
Purchase in bulk
reduce the waste of materials
What is the balance sheet
contains financial information required to draw conclusions about the liquidity of the business
What is liquidity
The ability of a business to meet its short term payments with its available assets
What does a balance sheet identify
A businesses assets, liabilities and the capital used to fund the business
What is an asset
resources owned and used by the business
What is a liability
a debt that has to be repaid
What are non current assets
owned by the business for a long time
What are current assets
items that are usually converted to cash quickly. for example, cash and inventory
What are current liabilities
money a business owes and is due soon - usually within 12 months
What are non current liabilities
Money a business owed that isn’t needed to be paid for at least 12 months
what is the formula for net assets
assets - liabilities
What are the two ways to measure liquidity
current ratio
acid test ratio
What is the current ratio
all forms of a current asset are included. how much a business has to cover per £ ofits debt
What is the formula for current ratio
Current assets - current liabilities
What is the acid test ratio
takes away stock from the current ratio
what is the calculation for acid test ratio
(current assets - inventory) / current liabilities
What are ways to improve liquidity
reduce the credit period for customers - quicker collection of money
ask suppliers for an extended repayment period - current liabilities wont be reduced
use overdraft or short term loans
sell assets
What is working capital
The amount of money a business has to fund day to day activities
What is the formula for working capital
current assets - current liabilities
What are 5 internal reasons for businesses failing
Poor planning
lack of leadership
ineffective marketing
cash flow problems
lack of funs
What are examples of poor planning
Poor budgeting
lack of R and D
Little innovation
What are examples of lack of leadership
Poor decision making
lack of urgency
lack of delegated tasks
lack of skills
What are examples of ineffective marketing
not enough market research
poor understanding of customer needs and wants
flawed products
promotional mistakes
What are examples of lack of funds
failure to attract investment
limited borrowing potential
limited capital
What are 5 external reasons why businesses fail
Economic challenges
changes in consumer tastes
legal factors
market challenges
technological change
What are examples of economic challenges
rising interest rates
fluctuating exchange rates
periods of recession
