2.3 Managing Finance Flashcards
What’s the equation for gross profit??
GP = Revenue - Variable costs
What’s the equation for Gross profit margin??
(GP/Revenue) x 100
What are 2 possible causes for: Gross Profit falling and Gross Profit increasing
Falling: Higher supply costs, lower sales prices
Increasing: Better supply buying, rising sales prices
What’s the equation for Operating Profit??
OP = Gross profit - Fixed Costs
What’s the equation for Operating Profit margin??
(OP/Revenue) x 100
What’s the equation for net profit (profit for the year)?
Operating profit - interest
What are 2 complex approaches for increasing profits??
- Reduce product range (rid of products that make a loss/low profit to increase efficiency)
- Outsource non-essential functions (Reduce FC by focussing on what business is good at)
What’s the liquidity of an asset??
How quickly it can be turned into cash & used to buy things
What do liquidity ratios do??
Assess whether a business has sufficient cash or equivalent current assets to pay the bills/debts
What’s a balance sheet??
Snapshot of the business’ assets & its liabilities on a particular day
What’s the equation for the current ratio??
Current assets/ current liabilities
What is the ideal current ratio??
Between 1.5 & 2
Below 1.5 = liquidity problem
Above 2 = Too much money tied up in assets that could be invested into business. Not maximising profit (puts investors off)
What’s the equation for the acid ratio??
(current assets - inventory)/current liabilities
Why is the acid ratio more accurate??
It removes inventory from the current assets because inventory may take a long time to sell or may never sell!
What’s working capital??
Finance available for day-to-day spending!
What does having more working capital mean??
More liquidity
What is the equation for working capital??
Current assets - current liabilities
What is the working capital cycle??
Cash -> production costs -> finished stock -> sales
& this repeats
It is how long it takes a business to convert inventory into cash
What are 3 factors that affect how much cash a business needs??
- Longer working capital cycle = more cash
- High inflation = more cash
- Expansion = more cash to avoid overtrading
What’s overtrading??
When a business expands to quickly that it doesn’t have the resources (e.g. finances, staff, etc) to support this
What are customers who buy on credit called??
Trade debtors
What are 3 ways that customers buying on credit can be controlled??
- Have repayment terms
- Sell debts to debt factors (Debt companies)
- Cash discounts for prompt payments
What is business failure caused by??
The business not making enough money to cover costs
What are 3 common reasons that new business fail??
- No demand for idea
- Good idea poorly executed
- External shocks
What are the 3 internal financial factors causing business failure??
- Bad management of working capital
- Poor efficiency (costs higher than they should be)
- Bad decisions with finance methods (e.g. relying on overdrafts)
What are 3 internal non-financial factors causing business failure??
- Poor communication (less efficiency & mistakes are fixed slower)
- Inadequate market research
- Bad marketing
What are 2 external financial factors causing business failure??
- Economic recession (less consumer income)
- Exchange rate changes
What are 3 external non-financial factors causing business failure??
- Competitors (better/cheaper substitutes)
- Change in customer trends
- Poor communication with external businesses (e.g. suppliers and/or customers)
