2.3 Managing Finance Flashcards
(25 cards)
profit
the money left over after all costs have been accounted for
3 types of profit
gross profit
operating profit
net profit
gross profit
difference between revenue and costs directly related to production
GP = Revenue - Costs
operating profit
difference between gross profit and the indirect expenses
OP = Gross profit - Operating Expenses
Net Profit
the difference between the operating profit and any interest and one off costs
NP = operating profit - ( net interest + one off costs)
profit margins
the amount by which the sales revenue exceeds the costs
can be compared to previous years to better understand performance
gross profit margin
gross profit/revenue x 100
operating profit margin
operating profit/revenue x 100
net profit margin
net profit/revenue x 100
ways to improve profitability
increase prices
reduce variable costs
reduce expenses
reduce one off costs and interest
what is cash
the full range of money flowing in and out of a business
most liquid asset and can be used to settle debts most quickly
link trade credit with cash
when a business has a good relationship w/ a supplier they may give them trade credit - meaning the business will get stock but have 30 or 60 days to pay back - delaying cash outflow
as the business sells its products, it receives money generated and represents a cash inflow
will then pay supplier at the end of 60 days
businesses will fail if they do not have sufficient cash
liquidity
the ability of a business to meet its short term commitments with its available assets.
businesses need a good level of liquidity regardless of profit levels
ways to measure liquidity
current ratio
acid test ratio
current ratio and formula
All forms of current asset are considered in this ratio
The current ratio is an effective liquidity measure for businesses that hold little stock
current assets/current liabilities : 1
acid test ratio
inventory/stock is taken out so the ratio provides a more realistic measure of the businesses ability to quickly meet short term debts
important for businesses that have a lot of stock
current assets - inventory/ current liabilities : 1
ways to improve liquidity
reduce credit period offered to customers
ask suppliers for an extended repayment period
sell of excess stock
use overdraft or short term loans
working capital / net current assets
the money that a business has to fund its day to day activity
Working Capital = Current Assets - Current liabilities
problems with holding too much working capital
businesses will miss the benefit of investing and gaining a return.
holding lots of inventory will mean more money being spent on storage
how to effectively manage working capital
careful cash management such as selling inventory at a lower price and short term borrowing plans to increase cash levels
what is business failure
when a firm stops operations due to financial difficulties, poor management, or external pressures.
internal reasons why businesses fail (5)
poor planning
lack of leadership
ineffective marketing
cash flow problems
lack of funds
external reasons why businesses fail (5)
economic challenges
changes in consumer tastes
legal factors
market challenges
technological change
financial causes of business failure (3)
poor cash flow
excessive debt
lack of investment
