Managing Finance 2.3 Flashcards
Calculations for Gross profit, operating profit and net profit
Gross profit = Revenue - costs of sale (variable costs)
Operating profit = Gross profit - Other expenses (fixed)
Net profit = Operating profit - tax
Calculations for gross, operating and net profit margin
((Gross/operating/net profit)/Revenue) x 100
What does a low profit margin mean?
A business is inefficient because it is spending a lot of money on costs and so not gaining high profits
How can a business improve their profit margin?
Increasing revenues by increasing prices or by lowering costs.
What are 5 examples of a business trying to improve their profitability?
Making staff redundant, reducing employee wages, changing to a cheaper location, changing to a cheaper supplier, increasing prices
What is the distinction between cash and profit?
Profit is the difference between the price of the good sold compared to the cost of production so, profit is calculated after a sale is made. Cash is an indication of a businesses inflows and outflows which can be profited once debtors bay creditors.
What are debtors and creditors?
Debtors = Someone who owes money Creditor = someone who is owed money
What is an income statement?
Compares the income of a business to the costs and expenses of goods and services. Measures the businesses performance
What is a statement of financial position?
Snapshot of the business assets and its liabilities on a particular day
What is a cash flow statement?
How the business has generated and disposed of cash and liquid funds during the period under review.
What are a businesses current assets?
Assets which a business is able to turn into cash quickly
What are a businesses current liabilities?
Short-term debts which a business will need to pay quickly using its current assets
What are non-current assets?
Assets which cannot be turned easily into cash
What are non-current liabilities?
Debts that a business will have to pay in the long-term
What is liquidity?
The ease at which a business can quickly turn its current assets into cash to pay its current liabilities
What is a balance sheet?
A document showing the liabilities and assets of a business and therefore giving an insight into the liquidity of a business
Measuring liquidity using current ratio:
Current assets/current liabilities
How many assets a business has to pau current liabilities
Higher ratio is an indication that a business is more likely to pay of its debts
Measuring liquidity using acid test ratio:
Current assets - stock/liabilities
It does not assume that all stock will be sold so, it is likely to be much lower than current ratio
Ways to improve liquidity?
Pay suppliers later: Extending period of paying current liabilities for them to then become non-current liabilities. This gives the business time to improve its liquidity
Increase long term borrowing: Give a business time to improve liquidity
What is working capital and the formula?
Current assets - current liabilities
Money a business has to meet its day to day activities
What is the cycle of working capital?
The time it takes to convert net current assets and current liabilities into cash
What will ensure a business does not go bankrupt?
Current assets must be higher than current liabilities. A business must be able to manage its working capital to prevent shortages of cash.
What are some internal causes of business failure?
Inefficiency, Poor market research, Failure to innovate, Poor cash flow management, Lack of capital leading to excessive borrowing, poor leadership
Explain how poor cash flow management might cause business failure.
If a business fails to manage its cash flow, it may have expenses that need to be paid therefore less current assets than its current liabilities. This might financially put the business at risk of being unable to pay its debts therefore causing risk of failure
What are some external factors that might cause business failure.
Competition increased, a stronger pound, Government policies and recessions
Explain how a recession may cause business failure
If there is a sudden change to a economic conditions from a recession, this may decrease demand as people can afford less. This may therefore mean a decrease in sales for businesses, decreasing revenues and risk of failure.
Examples of Non current and current assets
Non current assets - Machinery, vehicles and premises
Current assets - cash and inventories and receivables
Examples of current and non current liabilities
Non current - Bank loans (mortgages)
Current - Overdrafts and accounts payable (creditors)
