managing finance Flashcards
profit
the difference between the revenue of a business and the costs generated by the business during a period of time
how can a business identify what things are doing well or badly for them
by analysing the differences between the different types of profit
different types of profit
gross , operating , net
gross profit
this is a raw measure of profit that deducts costs from total revenue to show what is left after taking away the costs directly involved in making a product or providing a service
operating profit
fixed overheads are deducted from gross profit. This is the clearest indicator of just how well a business has been run during a year. In simple terms - profit generated by the normal operating activities of the business
net profit
shows profit net of all costs except for corporation tax = operating profit - net financing costs and corporation tax.
fixed overheads meaning
are the costs that have to be paid no matter how well the business is performing, such as management salaries or rent
net financing meaning
is the income from interest on bank deposits minus the interest charges from overdrafts and loans.
ways to improve profit
- reduce costs
- increase revenue
the trade offs involved in improving profit
increasing revenue - spending more on advertising, pushing up costs
reducing costs - making sacrifices on quality or customer service, which may in turn decrease revenues
statement of comprehensive income
a document produced by a PLC that shows revenue, a break-down of different costs and different types of profit each year
profit figures and figures that show profitability differences
profitability states profit figures as a percentage of sales revenue=
( x profit / sales revenue ) x 100
ways to improve profitability
- increase selling price
- cut costs
issues with improving profitability
- increasing selling price may increase profit margins but not overall profit, as an increase in price may lead to drastic falls in sales volume
- using cheaper materials to cut costs can ruin a companies reputation and thus revenues
what kind of products are certain will have reduced profits once the price is increased
price elastic products
why are cash inflows and revenue different? examples
taking out a bank loan of 20,000 will be considered an inflow but not revenue
credit sales made to customers will be considered revenue but not cash inflow
liquidity
the ability of a business to find the cash it needs to pay its bills. the cash must be readily available either in the bank account or in the form of a payment from a customer.
balance sheet (statement of financial position)
all limited companies must send a balance sheet to companies house each year to show what the firm owns and what it owes, where it got its money form
what does it mean to measure liquidity
comparing the value of current assets against the current liabilities that will need to be paid. this can be done through two formulas: current ratio and acid test ratio
current assets
items that businesses owns in the form of cash or can be easily turned into cash (e.g stock)
current liabilities
are debts owed by the business that are due to be paid within the next 12 months. E.g overdrafts or trade creditors
current ratio
current assets / current liabilities.
enables a simple judgement on the firms liquidity
ideal value for current ratio
1.5:1
what is the issue with current ratio falling above or below 1.5:1
lower: it will face problems settling short term debts
higher: too much resources tied up in non-productive assets
acid test ratio
tougher liquidity test, does not count inventories as a liquid asset.
(total current - assets - inventories) / current liabilities
ideal value for acid test ratio
1:1
what is the issue with acid test ratio falling below 1.5:1
below: no cash to pay bills
how can u improve liquidity
bringing extra cash into the balance sheet:
- selling under-used fixed assets like equipment or machinery
- raising more share capital
- increasing long term borrowing through loans
- postponing planned investments
working capital
the money. that is available for the day to day running of the business
why is important to manage working capital
crucial to successful financial management to prevent blockages or delays and ensure there is always enough working capital
fixed assets
are items owned by the business which it intends to use over and over to generate profit. e.g property and machinery
