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Business > 2.3 Managing Finance > Flashcards

2.3 Managing Finance Flashcards

1
Q

What are the 2 types of financial statements

A

Statement of comprehensive income (profit and loss)

Statement of financial position (balance sheet)

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2
Q

What can you find from a statement of comprehensive income

A

Changes in sales revenue

Changes in the direct costs of sales

How well a business is managing its operating costs

The profitability of a business

Unusual incomes/ expenses during the year

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3
Q

In a statement of comprehensive income what is the revenue/ turnover

A

Income from sales

Quantity sold x price

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4
Q

In a statement of comprehensive income what is cost of sales

A

Costs that are directly associated with making the product eg raw materials

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5
Q

In a statement of comprehensive income what is gross profit ( definition and calculation)

A

Difference between revenue and the cost of sales. It shows the profit made of the trading activity before any other costs are taken into account

Revenue - cost of sales

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6
Q

In a statement of comprehensive income what are selling expenses and admin expenses known as

A

Operating costs

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7
Q

In a statement of comprehensive income what is operating profit (definition and calculation)

A

Takes into account the other operating expenses on top of gross profit

Gross profit - selling expenses and admin expenses (operating costs) (other operating expenses)

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8
Q

In a statement of comprehensive income what is interest

A

If the business has borrowed any cash from external sources of finance

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9
Q

In a statement of comprehensive income what is profit for the year (net profit) (definition and calculation)

A

The actual profit the business has made

Operating profit - interest

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10
Q

In a statement of comprehensive income what is taxation

A

Money that the business owes to the government

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11
Q

In a statement of comprehensive income what is profit for the year (net profit) after tax (calculation)

A

Profit for the year - taxation

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12
Q

How do you measure profitability

A

The info in the statement of comprehensive income can show how well the business is performing

It’s possible to measure through calculating profit margins as they measure the size of profit in relation to revenue/ turnover

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13
Q

What’s gross profit margin and how is it calculated

A

Shows the gross profit made on sales turnover/ revenue

Gpm= gross profit margin
—————————— X 100
Revenue

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14
Q

Why are higher gross profit margins favourable to low ones

A

It means that more gross profit is being made per £1 of sales

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15
Q

How do you increase the gross profit margin

A

Raising revenue/ turnover relative to the cost of sales by increasing price

By cutting the cost of sales which may be achieved through funding cheaper suppliers of key materials

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16
Q

Why does the gross profit margin vary between industries

A

The quicker the turnover of inventory, the lower the gross profit margin that is needed
Eg a supermarket with a fast stock turnover is likely to have a lower gross profit margin than a car retailer with a slower stock turnover

Therefore some supermarkets are very successful with low gross profit margins

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17
Q

What’s the operating profit margin and how is it calculated

A

Shows the operating profit made on sales revenue/ turnover

It’s used to measure a company’s pricing strategy and operating efficiency

It gives an idea of how much a company makes (before taxes and interest) on each pound of sales

Opm = operating profit
————————— X 100
Revenue

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18
Q

Why is a high operating profit margin preferred

A

Because more money is made on each £1 of sales

If the opm is increasing, the company is earning more per pound of sales

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19
Q

What’s profit for the year margin (net profit) and how is calculated

A

It takes into account all business costs including interest, other non- operating costs and exceptional items

It’s also usually calculated after tax has been deducted

Npm = net profit before tax
——————————— X 100
Revenue

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20
Q

Why are higher net profit margins usually better

A

Because it is the final amount of profit left over for the owners

The net profit margin focuses on the ‘bottom line’ in business which refers to the bottom line in the statement of comprehensive income which shows the profit left after all deductions have been made

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21
Q

How can you increase revenue

A

Increase prices

Reduce processes (dependent on PED)

Create awareness and desire through marketing

Add value to the product - increase benefits and features

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22
Q

Why are some businesses unprofitable

A

No demand

Selling at wrong price

Low contribution per unit

Poor management of costs

Expansion of business

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23
Q

How can you increase profit

A

Increase revenue

Decrease costs

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24
Q

How to decrease costs

A

Reduce production costs

Improve efficiency

Use capacity more fully

Eliminate unprofitable processes- such as unprofitable lines

Reduce variable costs- negotiate better deals with suppliers

Lower overheads- move to a cheaper location

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25
Q

What’s the difference between cash and profit

A

Profit is an absolute position when all costs have been deducted from revenue

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

A business cannot be profitable unless it effectively manages cash flow

26
Q

What is a statement of financial position (balance sheet)

A

Normally produced at the end of the financial year

It’s like a photograph of the financial position of a business at a particular point in time

It provides a summary of its assets, liabilities and capital

27
Q

In a statement of financial position what are assets

A

Resources owned by a business

Capital + liabilities

28
Q

In a statement of financial position what are liabilities

A

Debts of the business

They are a source of fund for a business and may be short term (overdraft) or long term (mortgage)

29
Q

In a statement of financial position what will be equal

A

The value of assets will be equal to the value of liabilities and capital

30
Q

In a statement of financial position what is capital

A

The money put into the business by the owners

It’s used to buy assets

31
Q

What are non current assets

A

Long term resources that the business will use repeatedly. They may be called fixed assets

Eg land, property

32
Q

What are current assets

A

Will be changed into cash within 12 months
They are called liquid assets

Eg inventories (stocks of raw materials, components and finished goods), trade and other receivables (debtors) (money owed to a business), cash or cash equivalents (money held in bank accounts)

33
Q

What’s the liquidity of an asset

A

The liquidity of an asset is how easily it can be converted into cash

34
Q

What are current liabilities

A

Any money owed by a business that must be repaid within a year

Eg loan and borrowings, trade and other payables (money owed by the business to suppliers of raw materials), components aka trade creditors, current tax liabilities ( employees income tax, VAT, corporation tax)

35
Q

What are non current liabilities

A

Long term loans and any other money owed by the business that doesn’t have to be repaid for Atleast a year

36
Q

How to calculate net assets

A

Total assets - total liabilities

37
Q

What’s shareholders equity

A

Summary of what is owed to the owners of the business.

Share capital and retained earnings (retained profit) are common examples

38
Q

How can you measure liquidity

A

Current ratio

Acid test ratio

39
Q

What’s current ratio and how is it calculated

A

A liquidity ratio and focuses on the current assets and current liabilities of a business

Current ratio= current assets
————————
Current liabilities

40
Q

What will the current ratio be between if the business is regarded as having sufficient liquid resources

A

Between 1.5:1 and 2:1

This is like saying the business has £2 of current assets for every £1 of current liabilities

41
Q

What will the current ratio be if the business is over borrowing or over trading

A

Below 1

42
Q

What would it mean to operate at a current ratio above 2:1

A

It may suggest that too much money is tied up in stocks

43
Q

What is acid test ratio and how is it calculated

A

A more severe test of liquidity because inventories are not treated as liquid resources

There’s no guarantee that stocks can be sold and they may become obsolete or deteriorate. They are therefore excluded from current assets when calculating the ratio

Acid test ratio= current assets- inventories
——————————————-
Current liabilities

44
Q

What does it mean if a business has an acid test ratio of less than 1:1

A

It means that it’s current assets minus stocks don’t cover its current liabilities

This could indicate a potential problem

It varies for different industries

45
Q

What’s working capital (circulating capital) and how is it calculated

A

The amount of money needed to pay for the day to day trading of a business

A business needs working capital to pay expenses such as wages, electricity and gas charges

The working capital of a business is the amount left over after all current debts have been paid

It is:

  • the relatively liquid assets of a business that can easily be turned into cash
  • the money owed by a business which needs to be paid in the short term

Working capital= current assets- current liabilities

46
Q

What does it mean if a business has low levels of working capital

A

It may be struggling or threatened with closure

47
Q

How can you manage working capital

A

Size of business - sales typically generate a need for stocks, trade credit and cash. Hence the larger the business, the larger the amount of working capital there is likely to be

Stock level- businesses is different industries have different needs for stocks. Businesses which are able to adopt JIT techniques will carry lower stocks. The more stocks a business needs the higher it’s working capital will be, all other things being equal

Debtors and creditors- the time between buying stock financed by trade credit and selling finished products can influence levels of working capital. Few businesses are fortunate enough to be able to operate with negative working capital. Typical businesses need around twice the amount of current assets as current liabilities to operate safely

48
Q

How can you maintain adequate levels of working capital

A
  • if they keep too little( current assets are too low and current liabilities are too high) they’ll start to encounter trading problems
  • if a business does not count enough stocks of raw materials, it could find that production is halted when it runs out of stock. If it doesn’t carry enough finished stock it may be unable to fulfil orders on time
  • if there’s not enough cash in the business it may not be able to pay its bills on time
  • if it had borrowed too much through trade credit, it may be unable to pay invoices
49
Q

How do you calculate total assets

A

Non current assets + current assets

50
Q

How do you calculate total liabilities

A

Current liabilities + non current liabilities

51
Q

How to calculate net assets

A

Total assets - total liabilities

52
Q

What’s total equity on a balance sheet and how to calculate it

A

Total money invested into the business

Share capital + retained earnings

53
Q

What are net assets always the same as

A

The same as total equity and if they’re not the same the balance sheet has been done incorrectly

54
Q

On a balance sheet what are intangible assets

A

Brand name, worth of brand

55
Q

On a balance sheet what are cash and cash equivalents

A

Physical money

56
Q

What are the internal causes of business failure

A

Lack of planning

Lack of funds

Cash flow problems

57
Q

Explain the internal cause of business failure - lack of planning

A

At the start up stage, entrepreneurs can be prone to overlook the importance of planning. A thorough business plan is needed to provide a clear vision for the future so that owners can take an objective and critical look at the whole business idea

A plan will provide a roadmap that shows clear direction for the development of the business and help to identify potential problems in advance so that the business is better prepared to deal with them

Financial planning is crucial and entrepreneues need to ensure that the business is sufficiently funded to cope with weak cash flow in the initial stages

58
Q

Explain the internal cause of business failure- cash flow problems

A 
There are a number of reasons why a business may run out of cash:
Over trading
Investing too much in fixed assets
Allowing too much credit
Overborrowing
Seasonal factors
Unforeseen expenditure
External factors
Poor finance management
59
Q

Explain the internal cause of business failure- lack of funds

A

Some businesses fail because they cannot attract funding. A lack of funding can affect both established businesses and new businesses

Established businesses may fail to attract funding because their track record is not as good as it needs to be. As a result they present too much of a risk for investors and other lenders

New businesses often struggle to attract funding because they don’t have a trading history and they’re too risky for investors

60
Q

What are the external factors causing business failure

A

Competition- a new competitor or an overcrowded market can lead to a shortage of demand and falling sales

Legislation- new legislation can often mean increased costs as a business adjusts its products and processes to comply

Market conditions- for example changes in commodity prices or consumer tastes

Economic factors- the business cycle

Business (18 decks)

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