managing finance Flashcards
formula for measuring percentage change in profit
pcp=current years profit -previous years profit divided by pervious years profit times 100
gross profit formula
GP=total revenue-cost of sales
operating profit formula
OP=gross profit-other operating expenses
net profit formula
NP=operating profit-interest
what is a statement of comprehensive income
shows how much money has been coming into business (revenue) and how much has been going out (expenses) over period of time
figures can be used in assessing business financial performance
can include previous years data, for easy comparison, to see what’s changed
profit margins definition
show how profitable business is
measure relationship between profit made and the revenue
tells you what percentage of selling price of product is actually profit
gross profit margin formula
gross profit divided by revenue times 100
operating profit margin formula
gross profit divided by revenue times 100
net profit margin formula
net profit divided by revenue times 100
ways business increase their profit margin
increasing revenue
can be done by increasing prices
reducing their prices to increase demand
improve product quality
reducing costs of sales
how are cash and profit different
cash-what a business has now to pay its bills
constantly flowing in and out of business
profit-doesn’t get profit made straight away
customers may not pay for their goods straight away
business that’s making lots of profit, may still run out of cash
business that has lots of cash, might end up not making a profit
balance sheets (statements of financial position)
lists of assets and liabilities
snapshot of firms finances at fixed point in time
show value of all businesses assets and liabilities
what are assets
things that belong to the business including cash in the bank
what are liabilities
things business owes
net assets value fomula
NAV=total fixed and current assets minus total and current liabilities
current assets definition
assets that business is likely to change for cash within a year, before next statement of financial position (balance sheet) is made
non-current assets definition
assets business is likely to keep for more than a year
lose value as get outdated so worth less every year(depreciation)
e.g property
current liabilities
debts which need to be paid off within a year
e.g overdrafts, taxes
non-current liabilities
debts that business will pay off over several years e.g. mortgages, loans
what are bad debts
debts whihc dont get paid by debtors
liquidity definition
how easily an asset can be changed into cash and used to buy things
examples of things that are liquid
CASH
examples of things that are not liquid
non current assets e.g factories and stock
what is it called when business doesnt have enough assets to pay its libabilities
insolvent
whats liquidisation
sell all assets to pay off debts
what does liquidity ratio do
shows how liquid a firm is
what are the names of the two liquid ratios
current ratio
acid test ratio
study tip: CAT
current ratio formula
CR=current assets divided by current liabilites
acid test ratio formula
ATR=current assets-inventory divided by current liabilities
working capital
finance avaliable for day to day spending
amount of cash business has avaliable to pay its day to day debts
more working capital, more liquid business is
working capital formula
current assets-current liabilities
what is the working capital cycle
length of time between buying raw materials and getting cash from the sales of the finished product
usually measured in days
what is business failure
business can no longer stay open because not making enough money to cover its costs
business isn’t able to continue trading and shuts down still owing people money
finanical factors as to why a business may fail
bad management of working capital
not having enough cash to pay for business day to day running costs
poor effiecieny-business has costs that arent as low as they could be. mean they could charge higher prices then there compeittors, lead to not enough revenue to keep them operating
bad decisions on how firm is financed-man rely too much on overdrafts meaning costs are very high
non financial factors as to why business may fail
poor communication-different departments of business aren’t working well together
strategies to fix issues are not communicated better
failure to innovate-business fails to keep up with consumer preferences, lacking innovative new products, more likely to fail
finacial external factors that may cause business failure
changes in excahnge rates
non finanical external factors which can cause business failure
actions of competitors. if compeitors able to offer simailr products at lower price or develop new products that are more desriable, customers more likely to go for them
change in consumer trends-customers suddenly stop wanting to buy product then revenue suddenly drops
what types of businesses are more likely to have business failure
dynamic-lack of innovative as constantly changing
large-poor communication
