2.3 managing finance Flashcards
Define profit
The difference between the revenue and costs generated by a business over a period of time
What is the formula for gross profit
Total revenue - Cost of sales
What is the formula for operating profit
Gross profit - fixed overheads
Define fixed overheads
Costs which have to be paid no matter how well the business is performing
E.g. Salaries and rent
What is the formula for net profit
Operating profit - (net financing costs and corporation tax)
What are net financing costs
The income from interest minus the interest charged on loans and overdrafts
What are the ways to improve profit
Increase revenue
Reduce costs
There is often a trade off between the two
What is a statement of comprehensive income
A document produced by a PLC to show a break down of revenue, cost and profit for a year
Define profitability
States profit as a percentage of sales revenue
What is the formula for gross profit margin
Gross profit / sales revenue X 100 %
What is the formula for operating profit margin
Operating profit / sales revenue x 100 %
What is the formula for Net profit margin
Net profit / sales revenue x 100%
What do profit margins mean
The higher the profit margin the better it is for the business
What are ways to improve profitability
Increase selling price
Cut costs
Why is profit no the same as net cash flow
Sales revenue does not equal cash inflows
Costs do not equal cash outflows
Define Liquidity
The ability for a business to find the cash it needs to pay its bills
What is a balance sheet
A document describing the financial position of a business , comparing what it owns (assets) and what it owes (liabilities)
What is a current asset
Are assets which are cash or can be easily turned into cash
What is a current liability
Are debts owed by a business that are to be paid in one year
What is the formula for the current ratio
Current assets / Current liabilities
What is the formula for the acid test ratio
(Total current assets - Inventories) / current liabilities
What are ways of improving liquidity
Selling under used fixed assets (equipment or machinery)
Raising more share capital
Increasing long term borrowing through loans
Postponing planned investments
Define fixed assets
Items used by a business which is used to generate profits
Define profitability
The profit as a percentage of sales revenue
What is working capital
Why is it essential
The money available for the day to day running of the business
Is it needed to make sure a business can operate and pay for materials, labour, capital
What is an income statement
A financial document from a business of the gross profit, operating profit and net profit
What is business failure
Where a company fails due to its inability to make profits or cover its expenses
What are the internal causes of market
Give examples
Marketing failure (poor decisions in the marketing mix)
Financial failure ( cash flow crisis)
Operations failure (physical systems break down)
Poor leadership (bad decisions)
What are the external causes of business failure
Give examples
Change in technology (competitors have new tech to produce faster)
New competitor (could operate more effectively)
Economic change (economy may fall, decreased demand)
Behaviour of banks (can charge higher interest rates)
What is the acid test ratio
It is used as an indicator as to whether a firm has sufficient current assets to cover its current liabilities
