Finance quic Flashcards
What is the accounting equation
Assets = Liabilities + Owners Equity
What is liquidity
The extent to which the business can meet its financial obligations in the short term
What is solvency
Ability of the business to meet its financial commitments in the long term - debt to equity ratio
Comment for current ratio
a ratio of 2:1 is recommended, otherwise reduce current liabilities such as overdrafts using retained proffits
non current assets can be sold to increase current assets
Comment for gearing - debt to equity
Goal is to have more equity and less debt otherwise business is vulnerable to interest rate rises
Business should have a ratio of 50-70%
Sell non current assets to pay liabilities, use profits to pay debts
Comment for improving collecting debtors efficiency by accounts receivable
Offer discounts for early payments, suspend credit to bad payers
Comment for improving gross profit ratio
Increase selling price, buy cheaper stock
Comment for improving net profit ratio
For every $1 of sales the business retains _cents as net profit
Source cheaper suppliers, increase selling price
Rate of return on owners equity comment
For every $1 of equity contributed, they receive _cents in return.
Improve gross profit ratio, improve net profit
Total cash receipts is
Cash inflow
Total cash payments is
Cash outflow
What is net cash flow
Total cash receipts - total cash payments
What is break even analysis?
The point which a business covers costs of production with sales.
What are the costs factored in break even analysis
Fixed costs = rent, insurance etc
Variable costs (price increases with more sales) = freight, packaging
Why is break even analysis important in planning a business
BE analysis finds the sales volume needed to cover costs and therefore assists in determining
likely success or failure of the new business.
It also enables a
business to set the selling price at a realistic amount which would encourage buyers yet still be
competitive.
