Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Business Theme 2 > Managing Finance 2.3 > Flashcards

Managing Finance 2.3 Flashcards

1
Q

What is profit?

A

Difference between the revenue of a business and the costs generated by the business during a period of time
- Number

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is profitability?

A

Efficiency with which a business is able to make profits
- %

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Calculation for profit

A

Total sales - total costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Calculation for gross profit

A

Revenue - cost of sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Calculation for operating profit

A

Gross profit - expenses + overheads

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is gross profit?

A

Difference between a business’s sales revenue and the cost directly related to production

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is operating profit?

A

Profit a business earns from its core operations, excluding costs such as interests + taxes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is net profit?

A

Profit remaining after all expenses, including operating costs, interest + taxes, are deducted from the total revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What useful insights do profitability rations provide?

A
  1. Making profit?
  2. How efficient is business at turning revenue into profit?
  3. Profit enough to justify investment?
  4. Profit compared to rest of industry?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Calculation for gross profit margin (%)

A

(Gross profit/ revenue) x 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Calculation for operating profit margin (%)

A

(Operating profit/ revenue) x 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What does the operating profit margin tell us?

A
  1. Effectivity business turns sales into profit
  2. Effectiveness of business running
  3. Whether business is able to add value during production process
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What ways can a business improve their profit?

A
  1. Increase quantity sold
  2. Increase selling price
  3. Reduce VC per unit
  4. Increase output
  5. Reduced FC
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Why will a business increase quantity sold to make more profit?

A
  • Higher sales volume= higher revenue + higher market share
  • Depends on PED
  • Competitors are likely to respond
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Why will a business increasing selling price to make more profit?

A
  • Higher selling price= higher revenue
  • Perceived higher quality
  • Depends on PED
  • Customers may switch to competitors
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Why will a business reduce its VC per unit to make more profit?

A
  • Increase value added per unit sold
  • Quality improved through lower wastage
  • Could be lower quality outputs?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Why will a business increase production output to make more profit?

A
  • Greater quantity of products to be sold
  • Needs to acc sell
  • FC may rise
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Why will a business reduce FC to make more profit?

A
  • Reduces BE output
  • Can’t affect quality of item
  • Reduce ability to increased sales?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is the difference between profit and cash flow?

A

Profit= measures business financial gain
Cash flow= tracks the money in/ out of the account

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

How do profits and cash flow link?

A
  • Profits= main source of funds for established business
  • Revenue turns to inflows
  • Costs turns to outflows
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

How do profits and cash flow differ?

A
  • Time differences
  • Way fixed assets are accounted for
  • Cash flows arising from the way the business is financed
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is a statement of comprehensive income?

A

Measures the business’s performance over a given period of time
- Compares income against cost of good + expenses incurred during that revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is a statement of financial position?

A

Snapshot of the business’s assets and liabilities on a particular day

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is a cash flow statement?

A

Shows how the business has generated and disposed of cash + liquid funds during the period under review

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What are non-current assets?
- Something the business owns + keeps for more than a year e.g. Land, buildings, machinery, goodwill
26
What are current assets?
- Items a business owns that are in the form of cash/ easily turned into cash e.g. inventory, accounts receivables (debtors), cash
27
What are current liabilities?
- Short term financial obligations that a business owes to a 3rd party e.g. creditors, bank overdrafts
28
What are non-current liabilities?
- long term financial obligations of a business that aren't expected to be settled within a year e.g. Bank loans, mortgage
29
Net current assets calculation
Current assets - current liabilities
30
Net assets employed calculation
Non current assets + net current assets
31
Net capital employed calculation
Non current liabilities + total share holders equity
32
What is liquidity?
Assesses whether a business has sufficient cash/ equivalent current assets to be able to pay its debts as they fall due
33
Current ratio calculation
Current assets/ current liabilities : 1
34
How can you interpret current ratio results?
- 1.5-2.0= efficient management of working capital - Low ratio= cash problem - High ratio= too much working capital
35
Acid-test ratio calculation
Current assets - stock/ current liabilities
36
How can you interpret acid-test ratio results?
- Good warning sign of liquidity problem for business that holds stock - <1= bad news
37
How can you manage cash flow effectively?
Day 1= Inventories ordered from suppliers Day 2= Stock delivered Day 3= Production turns inventory to products (Outflows- cash paid to suppliers & employees) - Finished goods held until a customer found - Products sold to customers - Customers pay for purchases (Inflows- cash paid by customers)
38
What are the most common causes of cash flow?
1. Low profits/ loss 2. Too much production capacity 3. Excess inventories 4. Allow customer too much credit 5. Overtrading 6. Seasonal demand
39
How does low profits/ losses result in cash flow problems?
- Over LT - Profit most important source of finance - Lack of profit= business failure
40
How does too much production capacity result in cash flow problems?
- Spending too much on fixed assets - Worse if ST finance used - Fixed assets hard to turn back into cash
41
How does excess inventories held result in cash flow problems?
- Excess stock= tied up cash - Stock becomes out of date - Enough stock to meet demand - Bulk buy= lower purchase price
42
How does allowing customers too much credit & too long to pay (trade debtors) result in cash flow problems?
- Credit= good way to build sales - Late payment= common problem
43
How does overtrading result in cash flow problems?
- Business expands too quickly (pressure on ST finance) - Keen to open new outlets - Pay rent in advance - Large outlay before sales begin in new stores
44
How does seasonal demand result in cash flow problems?
- Predictable changes in demand & cash flow - Production advanced in seasonal peak= outflows before inflows - Cash flow forecasts allow seasonal changes
45
What is the key to managing cash flow problems?
1. Regular + reliable cash flow forecasting 2. Managing working capital 3. Sufficient + suitable sources of finance
46
What are debtors?
Amounts owed by customers
47
What are creditors?
Amounts owed to suppliers
48
What are inventories?
Cash ted up in raw materials, work in progress + finished goods
49
Ways of improving cash flow from debtors
1. Effective credit control (terms + conditions, credit checking) 2. Debt factoring (reduce income + profit margin, sell debtors to 3rd party)
50
Why is improving cash flow from creditors good to control cash?
- Delayed payments retain cash longer - Need to be careful not to damage credit reputation - Delay payment to creditors to enhance cash flow
51
Why is improving cash flow from inventory good to control cash?
- Stockholding is costly - Keep smaller balances -Computerise ordering to improve efficiency - Improve stock control
52
What is liquidation?
Process of closing a business & selling its assets in order to pay off its debts
53
Why do business's fail?
Doesn't have enough cash to pay the bills
54
What marketing/ strategic problems can cause business failure?
1. Not understanding customers 2. Failure to differentiate from rivals 3. Not communicating what special about products 4. Poor leadership 5. Not finding enough ways to generate revenue 6. External shocks
55
Why is there a high failure rate of new businesses?
1. Hard to test business model without trading 2. Easy to over optimistic 3. Competitor response aggressive 4. Management lack experience
56
What are the financial reasons for why businesses fail?
1. Poor management of cash flow 2. Inadequate financing
57
What are the non-financial reasons for why businesses fail?
1. Lack of management control 2. Significant external shock
58
What is the evidence of poor management of cash flow?
- Large increase in stock level - Inadequate stock control - Poor accounting practices - Bad debts - Inaccurate forecasting - Failure to plan for significant capital
59
What is the evidence of inadequate/ inappropriate financing?
- ST overdrafts for LT investments - Failure to use debt factoring - Inadequate shareholder capital
60
What is the evidence of lack of management control?
- Failure to develop credible business plan - Failure to understand costs/ markets - Failure to administer business - Unethical behaviour lead to substantial business costs - Excessive marketing expenditure
61
What is the evidence of significant external shocks?
- Loss of major customers - Sudden decline in market demand - Changes in legislation
62
How can marketing mistakes lead to business failure?
- Market research badly conducted - Promote to wrong demographic - Prices to high/ low
63
How do good business leaders ensure their business survives changes in external env.?
- Plan in advance - Predict changes coming - Competitor analysis
64
Why might a growing market lead to business failure?
- More competitors - Overtrading - Adaption has high costs + may not work

Business Theme 2 (3 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions