2.3 Managing Finance Flashcards
what is amortisation?
the writing off of an intangible asset
what is cost of sales?
the direct costs of a business
what is meant by exceptional costs?
a-one-off costs such as a large bad debt
what the definition of by gross profit?
the difference between revenue/turnover and cost of sales
what is the definition of by gross profit margin?
gross profit expressed as a percentage of revenue/turnover
what is the definition of meant by operating profit?
the difference between gross profit and business overheads, such as selling and administrative expenses
what is the definition of by operating profit margins?
operating profit expressed as a percentage of revenue/turnover
what is the definition of profit for the year or net profit?
the difference between operating profit and interest and exceptional item
what is the definition of profit for the year margin or net profit margin?
net profit before tax, expressed as a percentage of revenue/turnover
What is meant by statement of comprehensive income/
a financial document showing or company’s income and expenditure over a particular time period, usually one year
What is meant by revenue or turnover?
the total income of a business resulting from sales of goods or services
What is gross profit?
- gross profit is the measure of how efficiently the business sells it goods and service
- you want this to be as high as possible
How do you calculate gross profit?
gross profit = revenue (turnover) - lost of sales
What are some examples of cost of sales?
costs of sales is the direct costs associated with the production of the product or service. that would be raw materials, wages and other costs what you may refer to as variable costs
What is operating profit?
-operating profit measures how much profit a business makes after all the business’s costs have been deducted
How do you calculate Operating Profit?
Operating profit = Gross Profit - Operating Expenses
what are operating expenses?
- operating expenses are the indirect costs of the business
- indirect costs are the equivalent of the businesses fixed costs and include expenses such as rent, office, heating and salaries of directors
What is meant by net profit?
bet profit measures the businesses final profit, before any taxes is calculated or dividend paid to shareholders
How do you calculate net profit?
Net Profit = Operating profit - interest and exceptional costs
- interest will be the difference between and interest paid by the business (on loans and overdrafts) and interest received (from savings for example)
- Exceptional items are large one off items, such as a bad debt
what is Statement of comprehensive income (profit and loss account)?
a financial document showing a company’s expenditure over a particular time frame, usually a year
How do you calculate Gross profit margin?
gross profit margin = gross profit / revenue x 100
in this case the higher the ratio the better, it shows how much gross profit is made for each £1 of sales
how can you improve gross profit margin?
to improve the gross profit margin a business would look to:
- increase revenue by increasing the price. if costs stay the same GPM will increase
- Reduce costs, Reducing the costs of sales by reducing raw material or utility cost for example would mean an increase in GPM
why will Gross Profit Margin be different in different industries?
as a rule, product with shorter lifespans have a lower GPM, a supermarket for example would make small GPM per item than a car sales dealership however the super market will generate its large profits through sales volume
how do you calculate operating profit margin?
operating profit margin = operating profit/ revenue x 100
the higher the ratio the better. its shoes how much operating profit is mad for each £1 of sales. It shows a good measure of the business’ true trading profitability, before exceptional item are taken off
why might Operating Profit be different in different industries?
- differences here are linked to the business’ overheads or fixed costs
- manufacturing industries will more likely have high overhead costs than office business due to large machinery costs compared to renting a office and buying a new computer every few years
How do you calculate net profit margin?
net profit margin = net profit/ revenue x 100
-this calculation shows the business’ profitability having taken account of ALL the costs over a course of the year
What is the most basic way of improving profitability?
profit = total revenue - Total Costs
- increase revenue
- lower costs
How can you increase revenue?
- increase price –> PED
- Increase value e.g. packaging, customer service –> increases costs?
- increase sales –> increase costs?
- improving Brand image –> increase costs? not necessarily going to increase sales
- Increasing productivity –> reduce staffing, not necessarily increase sales, staffing may want a raise –>increases costs –> staffing, training, machinery
How to reduce costs?
- Cheaper costs –> reduce quality, negotiate better pricing with original supplier
- Less waste suppliers –> efficiency, buying in bulk may still have extra waste
- Reducing packaging –> better for environment, PR, R+D–> new design increases cost
- Reduce Storage –> JIT –> not have enough, cant impulse buy, cant handle demand spikes
- reduce labour –> reduce morale
- reduce wages –> reduces morale
What is the distinction between cash and profit?
- its important that you understand the difference between cash and profit .
- Profit figures and bank balances are rarely the same
Why are profit figures and bank balances rarely the same?
this is because:
- credit sales
- timing differences
- purchasing of assets
- Owner cash injections
- Selling assets
- Opening balances
What is a statement of financial position?
a balance sheet
What is liquidity?
-liquidity is the ease with which a business’ assets can be converted into cash
it is vital that the business is able to meet its short-term debts
-this means they must have enough liquid resources (cash) to pay these debts as required
What is current ratio?
the measures the ratio of the business current assets to its current liabilities
How do you calculate current ratio?
current ratio = current assets/ current liabilities
What would a business like its current ratio to be?
- Generally a business would like its current ratio to be somewhere between 1.5:1 and 2:1
- Less than 1.5:1 and the business may struggle to meet its requirements to make payments as they fall due
- More than 2:1 and the business may be accused of not using its assets effectively
What is acid test ratio?
- similar to the current ratio, the acid test measures the business’ ability to meet its liabilities but uses a more severe
- it assumes that the business’ stock is worth less and so discounts it from the calculation
How do you calculate acid test ratio?
acid test ratio = current assets - inventories/current liabilities
