Paper 2- Theme 2.3 Managing Finance Flashcards
gross profit margin
total revenue - cost of sales
——————————————— x 100
total revenue
Operating profit margin
total revenue - cost of sales
- fixed overheads
——————————————— x 100
total revenue
Net profit (profit for the year) margin
total revenue - cost of sales
- fixed overheads - financing costs and tax
————————————————————— x 100
total revenue
Define statement of comprehensive income
-financial document that summarises a business’ main trading activity and expenses to show if profit or loss has been made
Uses for profitability ratios
- shows if a business is growing
- shows efficiency at turning costs into profit
- compare profit and costs with other companies in market
- shows where greatest costs come from
Ways to improve profitability
increase sppu decrease vcpu increase output decrease fixed costs increase quantity sold
Difference between profit and net cash flow
• timing differences
-business may not receive cash straightaway from customers (but will receive revenue) or have to pay their suppliers straightaway
•sources of finance (cash in, not revenue)
-revenue comes from one source sales to customers.cash flow comes from sales, sale of assets, bank loan
•the way fixed assets are accounted for
- payment for fixed assets (e.g. equipment) counts as cash outflow
- depreciation of fixed assets comes out of profit
what is the measure of liquidity
statement of financial position (balance sheet)
Define liquidity
a firms ability to pay its bills (short term liabilities and debts) on time
Net current assets (……….) =
(working capital)
current assets - current liabilities
Net assets =
Formula
(non current assets + current assets)
-
(non current liabilities + current liabilities)
net assets is equal to (……)
what is (…….) made up off
total equity
share capital retained profit (reserves)
what are current assets
examples
-expected to be sold / used within the accounting year
cash balance
trade receivables
inventories
what are current liabilities
examples
• liabilities that are to be paid within the accounting year
- trade payables
- short term borrowings (e.g. overdraft)
current ratio formula
ideal value
current assets
———————— : 1
current liabilities
approx. 1.5 : 1
Acid test formula
Ideal value
current assets - stock
———————————— : 1
current liabilities
0.75 - 1 : 1
why deduct stock from current assets in acid test
- hardest asset to turn into cash without a loss in value
- stock may become obsolete
- may take long time to sell stock
working capital is …
finance available for the day to day running of the business
describe the working capital cycle
—- the model showing the length of time for a complete cycle from cash out (buying stock- usually on credit) to cash in (customers buying product- usually on credit)
- highlights importance of sufficient contingency finance to meet daily requirements and any uncertainties.
(sufficient funds will be needed to pay for additional expenditure until revenue comes in)
importance of working capital
- too low could lead to bankruptcy
- too high leads to inefficiency
- ensures there is cash available to pay day to day bills
causes of working capital problems
- excess stock (cash tied up)
- allowing too many trade receivables
- overtrading
- level of gearing
- unforeseen circumstances (e.g. demand falls, supply cost rises) resulting in less cash to pay short term bills then the sales forecast predicted - need contingency finance
measures to improve liquidity (and working capital)
- sell under used fixed assets
- reduce payables
- reduce short term borrowing, increase long term
- sell shares to raise capital
- negotiate supply credit
- decrease stock level
what are non current assets
examples
• assets that won’t reach full value, be consumed or sold within the accounting year
- land and buildings
- goodwill (value of customer base)
- brand name
what are non current liabilities
Examples
• liabilities not due to payed within the accounting year
- long term borrowing (e.g. loan)
- mortgage
