2.3 Managing Finance Flashcards
What is gross profit?
The difference between revenue and the costs of sales, it shows the profit made on the trading activity before any other costs are taken into account
What is operating profit?
Takes into account the other operating expenses on top of gross profit
What is net profit?
the actual profit the business has made taking into account interest
How do you calculate gross profit?
revenue - cost of sales
How do you calculate operating profit?
gross profit - other operating expenses
How do you calculate net profit?
operating profit +/- interest
What are profit margins?
The ratio expressed as a percentage. It compares the profit figure to sales revenue (the proportion of sales revenue that has been converted into profit)
What is a gross profit margin and how is it calculated?
An indicator for analysing how a business has performed in terms of its direct trading activity. It helps a business understand if their products have been successful however, it doesn’t take into account indirect costs
Calculation:
gross profit/revenue x 100
What is an operating profit margin and how is it calculated?
Takes into account the performance of a business more fully, as it takes into account direct and indirect costs. It’s a useful tool when used alongside gross profit margin
Calculation:
operating profit/revenue x 100
What is a net profit margin and how is it calculated?
Takes into account all revenues and costs incurred by the business. |t’s a good measure of how effectively the business performed dover the financial year. It may be used to identify the potential to pay a dividend to shareholders
Calculation:
net profit/revenue x 100
What is the statement of comprehensive income?
Its a financial document that communicates revenue generated by a business and then its profit at various levels following a series of expenses and exceptional incomes
What are 5 things you can find out from the statement of comprehensive income?
1) changes in sales revenue
2) changes in the direct costs of sales
3) how well a business is managing its operating costs
4) the profitability of a business
5) unusual incomes/expenses during the year
What are 4 ways to increase revenue?
1) increase prices
2) reduce process (depends on PED)
3) create awareness and desire through marketing
4) Add value to the product- increases benefits and features
Explain what is meant by improving profit?
Profit is the difference between total revenue and total costs. You can increase revenue and/or decrease costs
What are 5 reasons why businesses are unprofitable?
1) no demand for the product
2) selling at the wrong price
3) low contribution per unit
4) poor management of costs
5) expansion of the business- profit retained and not available for return to shareholders
What are 6 ways to reduce costs?
1) reduce production costs
2) improve efficiency
3) use capacity more fully
4) eliminate unprofitable processes eg.unprofitable product lines
5) reduce variable costs- negotiate better deals with suppliers
6) lower overheads- move to cheaper location
What is the difference between cash and profit?
Profit is an absolute position when all costs have been deducted from revenue whereas cash flow is an ongoing concern. in order to reach a position of profit a business must manage cash flow so it can pay expenses and running costs. However, timing is crucial to this as expenses are often incurred before revenue is generated/received
What is the statement of financial position and what is it also known as?
A financial document that records the assets and liabilities of a business, it gives a snapshot of the value and financial strength of a business
aka. balance sheet
What are 6 things you can find out from the statement of financial position?
1) the value of a business (equity)
2) the current assets a business holds
3) short term liabilities the business will need to pay within the year
4) the liquidity of a business
5) the long term debts of a business
6) how a business has been financed
What is meant by liquidity?
A business’ ability to pay its debts and liabilities in cash when they fall due. Cash is the most liquid asset that a business has and any business would quickly fail if it ran out of cash
What is meant by current ratio?
It’s a liquidity ratio. It compares current assets with current liabilities and in doing so it assesses whether a business has sufficient working capital to pay its short term debts
How do you calculate the current ratio?
current assets/current liabilities
What is meant by acid test ratio?
A more severe measure of liquidity, it doesn’t take into account the inventories of a business as for many businesses there is no guarantee that inventories can be quickly turned into cash
How do you calculate the acid test ratio?
(current assets-inventories)/current liabilities
