Managing finance Flashcards
How do you calculate gross profit?
Revenue - Cost of sales
How do you calculate operating profit?
Gross Profit - Operating expenses (indirect costs)
How do you calculate net profit?
Operating profit - Interest (and exceptional costs)
What does the statement of comprehensive income show?
- Gross Profit
- Operating Profit
- Net profit
- Net profit after tax
How do you calculate gross profit margin?
Gross profit
—————— x 100
revenue
How do you calculate operating profit margin?
Operating profit
————————– x 100
revenue
How do you calculate net profit margin?
Net profit before tax
——————————- x 100
revenue
How can you improve profitability of a business?
- Lower costs
- Raise prices
- Using existing resources more efficiently
What does the statement of financial position show?
- Non-current assets
- Current assets
- Current liabilities
- Non- current liabilities
- Net assets
- Total equity
What is liquidity?
the ease at which assets can be converted into cash
How might a business measure liquidity?
Current ratio or acid test ratio
How do you calculate current ratio?
current liabilities
sufficiently liquid between; 1.5:1 and 2:1
below 1.5:1 means doesn’t have enough working capital
above 2:1 means too much money tied up unproductively
How do you calculate acid test ratio?
current liabilities
less than 1:1 means its current assets - stocks don’t cover liabilities
How might a business manage to operate with low liquidity ratios?
If most of its sales generate cash
What is working capital and how do you calculate it?
The amount needed to pay for day-to-day trading of a business.
Working capital = current assets - current liabilities
How might a business manage working capital?
- Size of business (larger the business = larger the amount of working capital there is)
- Stock levels (different industries : different stock levels)
- Debtors and creditors (time between buying stock financed by trade credit and selling finished products)
How can a business improve its liquidity?
- use overdraft facilities
- Negotiate additional short-term and long-term loans
- Encourage cash sales and sell of stocks
- Sale and leaseback
- Introduce fresh capital
What are the internal causes of business failure?
- lack of planning
- cash flow problems (over borrowing, poor financial management, investing too much into fixed assets - drains resources)
- lack of funds
- relying on a narrow customer base
- failure to innovate
- poor leadership
- marketing problems
What are the external causes of business failure?
- Competition
- Changes in legislation
- Changes in taste
- Economic conditions
- Changes in market prices
What are the financial factors that may cause a business to fail?
- Bankrupt
- Insolvent (cease trading of their own accord)
- SHORTAGE OF CASH
What are the non-financial factors that may cause a business to fail?
- Lack of planning
- inability to compete effectively
- failure to meet customer needs
- reluctance to change
- adverse economic conditions
