2.3 managing finance Flashcards
what is the formula for profit?
- total revenue - total costs
what is gross profit?
- the difference between revenue and cost of sales
what is the formula for gross profit?
- revenue - cost of sales
what is operating profit?
- the difference between gross profit and business overheads
what is the formula for operating profit?
- gross profit - other operating expenses
what is profit of the year/net profit?
- the difference between operating profit and interests/exceptional items
what is the formula for net profit?
- operating profit - exceptional items/interest
what is a comprehensive income statement?
- shows how much profit or loss has been made at the end of a financial year
what is a gross profit margin?
- measures the relationship between gross profit and revenue, assets and capital employes
what is the formula for gross profit margin?
- gross profit
——————- X 100
revenue
what is a operating profit margin?
- measures the relationship between operating profit and revenue, assets and capital employed
what is the formula for operating profit margin?
- operating profit
————————- X 100
revenue
what is a problem caused by low liquidity?
- struggle to pay suppliers
what are ways to solve a short term liquidity crisis?
- sell assets
- delay payments
what is liquidity?
- the ease with which assets can be converted into cash
what is a current ratio?
- measures the liquidity of a business
what is the formula for current ratio?
- ## current assetscurrent liabilities
what is a sufficient liquidity ratio?
- between 1.5:1 and 2:1
what is an acid test ratio?
- a more severe test of the liquidity of a business
- inventories (stock) are not treated as liquid assets
what is the formula for the acid test ratio?
- ## current assets - stockcurrent liabilities
what are ways to improve profitability?
- raise your price
- lower your costs
- operate more efficiently
what is a statement of financial position?
- shows what the business owns and what it owes
what is a statement of financial position split into?``
- assets
- liabilities
- capital
who is a debtor?
- owe us money
who is a creditor?
-we owe money
what are non-current assets?`
- the assets the business owns and expects to keep for more than 1 year
what are current assets?
- cash or the things a business owns that it wants to turn into cash within 1 year
- e.g raw materials, stock, cash
what are non current liabilities?
- debts a business has to pay over more than one year
- e.g. bank loan
what are current liabilities?
- debts a business has to pay within one year
- e.g. gas, electric, suppliers
what is capital?
- how the business is funded
what is working capital?
- the capital of a business which is used in its day to day trading operations
what is the formula for working capital?
- current assets - current liabilities
what is a liquidity ratio?
- the ratio between the liquid assets and the liabilities of a bank or other institutions
what is the formula for net assets?
- non current assets + net current assets - non current liabilities
what is the formula for total equity?
- share capital + retained profit + any other reserves
what is the formula for assets employed?
- non current assets + net current assets
what is the formula for capital employed?
- total equity + non current liabilities
what two parts of a statement of financial position should be the same?
- net assets and total equity
what are high risks of starting a business?
- high rate of failure for start ups
- difficult to test a model without trading
- easy to be over optimistic
- competitor response is often aggressive
why might a new business fail?
- no demand for the idea
- good idea, poorly executed
- external shock
what are financial reasons a established business fails?
- poor management of cash flow
- inadequate or inappropriate financing
what are non financial reasons why an established business fails?
- lack of management control
what is administration?
- a failing business appoints a specialist to rescue the business or wind it up
what is overtrading?`
- the situation where a business does not have enough cash to support its production and sales usually because it is growing to fast
what is Pareto’s law?
- 80% of revenue comes from 20% of customers
