2.3 Managing Finance Flashcards
Define Profit
Profit is the money left over after all costs have been accounted for
Gross profit formula
GP = Revenue - cost of sales
Operating profit formula
OP = Gross Profit - Operating expenses
Net Profit formula
NP = OP - Interest
What is the Statement of Comprehensive Income
The Statement of Comprehensive Income is an end of year financial statement that shows all of a businesses income and expenses over the previous twelve months
GP Margin Formula
GP/Revenue X 100
OP Margin
OP/ Revenue X 100
NP Margin
NP/ Revenue X 100
Define Cash
Cash is measured by taking into account the full range of money flowing in and out of a business
How to improve profitability
- Increase prices
- Reduce one-off costs & interest
- Reduce expenses
- Reduce variable costs
What is the Statement of Financial Position?
The Statement of Financial Position contains the financial information required to draw conclusions about the liquidity of the business
Define Liquidity
Liquidity means how easily and quickly something can be turned into cash without losing value.
Net Assets formula
Assets - Liabilities
Current ratio formula
Current Assets/ Current Liabilities
Acid test ratio formula
Current assets - inventory/ Current Liabilities
Methods to improve Liquidity
- Reduce the credit period offered to customers
- Ask supplier for an extended repayment period
- Make use of overdraft facilities or short-term loans
- Sell off excess stock
- Sell assets and lease fixed assets instead
- Introduce new capital and reduce drawings from the business
Define Working Capital
Working capital is the money that a business has to fund its day to day activities
It is often described as net current assets on the Statement of Financial Position
Net current assets formula
Current Assets - Current Liabilities
Internal reasons why businesses fail
- 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
