AC1.2 liquidity and solvency Flashcards
what is profit
Profit is the money you have left after paying for business expenses.
What is profitability
Profitability is a measure of an organization’s profit relative to its expenses.
what is a profit loss account/ income statement
shows how well the business has traded over the year and how much profit or loss it has made
what dose a profit loss account show
wheatear a business has made a net profit or loss over the last financial year
what is gross profit
profit before expenses are taken away(expenses like bills and that)
what is net profit
the profit after all expenses are taken away
ways to increase gross profit
-increase sales though advising
-buy cheaper stock/ buy cheaper materials to manufacturer with
-put the prices of products up
PROFIT AND LOSS ACCOUNTS will be used to make comparisons to help make decisions. Usually based on…….
It will be used to make comparisons to help make decisions. Usually based on:
TIME – e.g. are gross and net profits higher than last year? – if not plans should be put in place
TARGETS – Set targets of expected revenue and costs. Profit and Loss account shows if targets have been reached
COMPETITOR – Profit or loss. How does this compare with others in the same market?
WHAT SHOULD A BUSINESS DO IF THE PROFIT & LOSS IS WORSE THAN EXPECTED?
The business should take action by:
-Increasing advertising to boost sales and thus increase revenues
-Increasing prices
-Purchasing cheaper materials to reduce the cost of sales
-Reducing expenses by cutting back on the number of workers
HOW COULD A COMPANY CUT COSTS?
Buy lower quality materials- BUT- This will reduce the quality of the finished product, so sales may fall
Buy materials in greater bulk to take advantage of bulk discounts-BUT-
Materials will have to be stored adding to warehousing costs
Cut wages and salaries of workers-BUT- This will reduce the motivation of workers leading to lower quality customer service
Cash Flow Forecast
Cash flow forecasting is the process of obtaining an estimate or forecast of a company’s future financial position; the cash flow forecast is typically based on anticipated payments and receivables
how will Businesses use cash-flow forecasts
Businesses will use cash-flow forecasts to estimate the effects of their business decisions.
The forecasts will show the business:
The times they may need an overdraft
Whether it is worthwhile going ahead with a project.
IMPACT OF CASH FLOW FORECASTS ON STAKEHOLDERS (Managers and Workers.)
Shareholders: Impact of business decisions on cash – especially if they are asked for more
Managers: If their decisions will impact on the cash in the business.
Workers: If there will be occasions when their pay may be delayed.
IMPACT OF CASH FLOW FORECASTS ON STAKEHOLDERS (Customers and Suppliers)
- Customers: Those who have been asked to pay a deposit in advance of receiving goods may be interested in the cashflow
- Suppliers: When the business is predicting cashflow issues that might delay the payments of trade credit. This will help them to decide whether to allow such credit.
How Profitable Businesses Can Fail
A business can make a profit but have a negative cash flow.
Without enough cash to pay employees, suppliers, banks and taxes business will go bankrupt.
A business makes a profit when sales exceed costs.
