2.3 Managing finance Flashcards
gross profit
revenue - costs of goods sold
operating profit
gross profit - operating expenses
profit for the year
operating profit - interest, taxes, and other non-operating items
gross profit margin
percentage of gross profit in relation to revenue and indicates the profitability
(gross profit / revenue) x 100
operating profit margin
percentage of gross profit in relation to revenue and indicates the profitability
(profit for the year / revenue) x 100
net profit margin
(profit for the year / revenue) x 100
ways to improve profitability
increasing sales and revenue
reducing costs and expenses
improving operational efficiency
pricing optimization
productivity enhancements
effective cost management
exploring new markets or customer segments
enhancing product or service offerings
streamlining processes and workflows
distinction between profit and cash
profit = surplus earned from revenue exceeding expenses within a specific accounting period
cash = actual inflows and outflows of cash representing the liquidity and availability of funds
measuring liquidity
current ratio = current assets / current liabilities
measure of a companies ability to meet short term obligations using its current assets
acid test ratio
more stringent measure of liquidity that excludes inventory from current assets - focuses on the most liquid assets that can be quickly converted to cash
acid test ratio = (current assets - inventory) / current liabilities
ways to improve liquidity
increase cash reserves
improve receivable management
negotiate favorable payment terms
efficient inventory management
improve working capital cycle
working capital and its management: importance of cash
cash flow management - vital for smooth functioning of operations ensuring company can meet financial obligations
liquidity and financial stability - adequate cash reserves enhance a companies liquidity - provides a buffer for unforeseen expenses or economic downturns
flexibility and opportunities - having sufficient cash allows a business to seize growth opportunities, invest in strategic initiatives, or navigate challenging times without relying heavily on external financing
risk management - cash provides a safety net, mitigating risks associated with unforeseen events, economic fluctuating, or disruptions in supply chain
financial factors influencing internal and external causes of business failure
poor financial management - inadequate planning, budgeting, cash flow management, or failure to control expenses
insufficient capital - inadequate access to financing or insufficient capitalization can limit business’ ability to cover operational cost, invest in growth, or sustain unforeseen challenges
ineffective cost management - inability to manage costs, control expenses, or adapt to changing cost structures can erode profitability and jeopardize the financial health of a business
high debt burden - excessive borrowing, high debt levels, or inability to service debt obligations can strain cash flow and create financially instability
non-financial factors influencing internal and external causes of business failure
market factors - changes in market dynamics, intense competitions, shifts in consumers preferences, or inability to adapt to market trends
ineffective business strategy - poor strategic planning, lack of differentiation, failure to innovate, or inability to respond to market disruptions can hinder business growth and sustainability
leadership and management issues - inadequate leadership, weak management skills, poor decision making, or lack of vision
operational inefficiencies - in production, supply chain, distribution, or customer service can impact product quality, delivery speed, and customer satisfaction, leading to loss of competition advantage and customer loyalty
