3.5 Finance Flashcards
Define ‘cash’ in terms of a business environment:
Cash- money available to the business (including money in the bank). The most ‘liquid asset’ a business can have readily available. ‘Stock’ is less liquid as it has to be sold before you get the cash for it (lengthy process)
Define ‘liquidation’:
Liquidation: process of bringing a business to an end + distributing its assets to claimants- occurs when company is insolvent (unable to owe debts).
What is Revenue?
Revenue= selling price × Qty sold
Defined by: money brought into the business through selling of a product/service.
What is profit?
Profit = Total Revenue − Total Costs
Define by: The money left over after all costs are taken off revenue.
What is the formula for Total Costs:
Total Costs = Total Variable Costs + Fixed Costs
What is Gross Profit?
Gross Profit = T.R. - CoS (variable costs)
What is Operating Profit?
Operating Profit = T.R. - T.C. (not including tax or exceptional costs)
*Often used to make profits look attractive as possible to potential shareholders.
What is Net Profit?
Net Profit = T.R. - all costs, including tax (corporation tax is 20% of any profit)
What are fixed costs?
F.C. (also called indirect costs, expenses or overheads)
Are costs that do NOT vary with output produced.
However, you can have ‘stepped fixed costs’- output has hit a certain level that FC increase (rent, moving to bigger factory so FC of rent go up)
What are Variable Costs?
V.C. (also called direct costs, cost of sales [CoS])
Are costs which change according to no. products made by business.
Revenue - V.C. = Gross Profit.
What is ‘Break-Even’?
B.E. = The point where TC = TR: no profit, no loss.
Displayed as a number of units (rounded up to d.p.)
Calculated by: FC ÷ Contribution
The B.E. is the target to cover costs, any over will be profit generating.
How do you calculate Contribution?
Contribution = selling price per unit - variable cost per unit
What is the Margin of Safety?
MoS = the difference between B.E. target sales and actual amount sold.
What do profit margins (in general) tell us and why are they useful?
Profit Margins tell us the % of revenue that is converting into Gross Profit/ Operating Profit + Net Profit
Converting to % allows for better analysis + comparison (against competitors)
What happens when the Gross Profit Margin is too low?
GPM = too low, means CoS is too high or Revenue too low.
How to calculate Gross Profit Margin?
How to calculate Operating Profit Margin?
How to calculate Net Profit Margin?
