Managing finance (2) Flashcards
Profit
= total revenue- total costs
Money left after all cost have been Met and belongs to the business owners
Gross profit
cost of sales
exceptional costs
Turnover/revenue
Diff between revenue or turnover and cost of sales
(Revenue - cost of sales)
direct costs (of producing product)
one off costs eg. debt
Price x quantity of sales
How does cost of sales vary for different businesses
Retailer/ wholesalers= cost of buying in bulk
For Manufacturer cost associated with production eg. cost of raw materials, factory wages and other direct costs.
For supplier of service= any direct cost of wages
Operating profit
Overheads
Difference between gross profit and Business overheads (gross profit - operating expenses)
Indirect costs such as seeking and administrative expenses.
Profit of the year (net profit)
Difference between operating profit and finance costs(loans,interest) And any other exceptional costs
(operating profit- finance costs and exceptional costs)
Statement of comprehensive income
A formal Financial document to show a businesses Trading activity and expenses to show whether it has made a profit or a loss
1)Sales revenue
2)Cost of sales
3)Other operating expenses
4)Interest
5)Exceptional items
6)Profitability
1)Money coming in from sales (quantity sold x selling price)
2)Costs directly linked to the production of goods and services
3)All other expenses associated with trading of business
4)Interest paid on debt or received
5)An unusually large or infrequent transaction
6)a Measure of the financial performance of business by comparing profit to another variable eg. revenue
Ways of measuring profitability (X3)
Gross profit margin, gross profit and sales revenue
operating profit margin, operating profit and sales revenue
profit of the year, net profit and sales revenue
If _____ profit margin is Low or falling it indicates:
1)GPM
2)OPM
3)NPM
1)Sales r in decline
+ not managing cost of sales effectively
2)Sales r in decline
+not managing expenses effectively
3) GP/OP r in decline
+interest rates have changed
+taxation has increased
ways of improving profitability
1) RAISING PRICES- more revenue per unit sold ,however may causes fall in sales. (depends on demand responsibility to price)
2)LOWERING COSTS- cheaper resources eg. new supplier or labour HOWever could decrease quality/efficiency
amortization
the elimination of an intangible product
what is the difference between cash and profit?
profit indicates the amount of money left over after all expenses have been paid, cash flow indicates the net flow of cash into and out of a business
Statement of financial position (balance sheet)
Net worth
A formal financial document which indicates the net worth of a business at a given period in time
The amount of money left after all business assets have been turned into cash and all liabilities have been paid off
1)Assets
—>current
—-> non current
2)liabilities
—->current
—>non current
3)net assets
4)shareholders equity
TOTAL EQUITY AND BET ASSETS R =
1)Items of value owned by a business
—-> liquid assets that will be tuned into cash within a year (inventories)
—->long term resources that will be used by a businesses over a period longer than a year(machinery)
2)money owed by a business to banks
Money owed by a business that must be paid back within a year (overdrafts)
Debts the business has over a year to pay.(bank loans)
3)total assets-total liabilities
4) the amount of money owed by a business to shareholders
Liquidity
A measure of a firms short term survival- the ease of which assets can be converted into steady cash
Current ratio
Acid test ratio
BOTH assess wether or not a business will be able to meet any arising debts in the next 12 months
CURRENT ASSETS
————————–
CURRENT LIABILITIES
(1.5:1 or 2:1)
Liquid assets current liabilities
(Inventories r excluded)
CURRENT ASSETS -INVENTORIES
_________________________________
CURRENT LIABILITIES
(<1:1 might mean liquid assets do not cover current liabilities)
Ways to improve liquidity
INCREASE ASSETS, REDUCE LIABILITIES
Sell assets that are no longer being used i.e. turn them from a non-current assets to a current asset (cash)
Move cash balances from current accounts to HIGH INTEREST bearing accounts so its value increase more rapidly
Delay supplier credit terms
Switch to long term sources of finance
Monitor debtors to avoid bad debts
Ways to improve liquidity
INCREASE ASSETS, REDUCE LIABILITIES
Sell assets that are no longer being used i.e. turn them from a non-current assets to a current asset (cash)
Move cash balances from current accounts to high interest bearing accounts so its value increase more rapidly
Delay supplier credit terms
Switch to long term sources of finance
Monitor debtors to avoid bad debts
Working capital
A measure of firms liquidity/ability to meet day to day expenses.(current assets - current liabilities)
Importance of cash
meet its expenses
and have enough left over to repay investors and grow the business.
Internal causes of business failure
POOR CASH MANAGEMENT
- allowing too much credit
- over-borrowing
- poor financial management
- overestimating sales
- over-trading
POOR DECISION MAKING
lack of innovation
FAILING TO UNDERSTAND MARKET
market research
keep up with changing trends and advancements
external reasons fro business failure
interest rates
competition
exchange rates
market conditions
increased globalization
CHANGING SOCIAL TRENDS
online shopping
more price sensitive
