2.3 Managing Finance Flashcards
(60 cards)
2.3.1 Profit
How do you calculate gross profit?
Revenue - Cost of sales ( VC )
2.3.1 Profit
What is the operating profit?
Gross profit - other operating expenses ( FC )
2.3.1 Profit
How do you calculate net profit?
operating profit - Interest
2.3.1 Profit
What is the gross profit?
Those costs that vary with output
e.g costs of buying each pair of wellingtons = known as cost of sale
2.3.1 Profit
What is the operating profit?
that’s all costs associated with selling wellingtons including the rent of the stall, wages and transport
2.3.1 Profit
What is the net profit?
it is used to be reinvested
2.3.1 Profit
What does the profit figures can tell you about a business?
In general - the higher the better
gross - a fall in gross profit is a result of a fall in revenue of an increase in cost of sales
Net - a fall in net profit is a result of an increase in expenses
2.3.1 Profit
What is the statement of comprehensive income?
allows shareholders/ owners to see how the business has performed and whether it has made an acceptable profit ( return )
helps identify whether the profit earned by the business is sustainable ( ‘profit quality’ )
enables comparison with others similar businesses
allows providers of finance to see whether the business is able to generate sufficient profits to remain viable
2.3.1 Profit
How do you calculate gross profit margin?
gross profit / revenue X 100
2.3.1 Profit
How do you calculate operating profit margin?
operating profit/ revenue X 100
2.3.1 Profit
How do you calculate net profit margin?
net profit / revenue X 100
2.3.1 Profit
How do you calculate sales revenue?
selling price X quantity sold
2.3.1 Profit
What the point in ratio analysis?
analysis of published account
shows relationships between figures
can be used for comparison
internal and external
2.3.1 Profit
What is profitability?
measures the financial performance of a business by comapring profits achieved to a second variable e.g. revenue
2.3.1 Profit
What are the three profitability ratio?
gross profit margin
operating profit margin
profit for the year ( net profit ) margin
2.3.1 Profit
What does the different margins tell us?
Gross profit = whether a business is able to ‘ add value ‘ during the production process ( a high margin must be doing something right! )
= decrease in gross profit > decrease of profit > increased revenue
operating profit & net profit = how efficiently a business is run, how well it manages its expenses
= decrease in each of them > increases expenses
2.3.1 Profit
What are the key differences between profitability and profit?
profitability is a financial metric that companies use to determine how successful they are
a relative measurement and is normally expressed as a ratio
profit on the other hand is an absolute measurement
it is a concrete figure that is expressed as a dollar amount
a company doesn’t have to be profitable to earn a profit
2.3.1 Profit
How can increasing quantity sold improve profitability?
why:
higher sales volume = higher sales, assuring that the selling price is not lowered
makes a better use of production capacity ( i.e fixed costs should not rise )
may result in higher market share
Will it work :
depends on the elasticity of demand
sales volume may actually falll if price has to be reduced to achieve higher sales volume
does business have capacity to sell more?
why it might not work? :
competition are likely to respond
marketing efforts may fail - e.g promotional campaign does not generate results
fixed costs might actually rise - e.g higher marketing
2.3.1 Profit
How can increasing selling price improve profitability?
why:
higher selling price = higher sales ( assuming quantity sold does not fall in response )
maximises value extracted from customers
customers may percieve product as higher quality
no need for extra production capacity
will it work:
depends on price elasticity of demand
sales value may actually fall price rise is matched by an even bigger fall in quatity sold
it will work if customers remain loyal and still percieve product to be good value
why it might not work:
competitors are likely to repsond
customers may decide to switch to competitors
2.3.1 Profit
How can reducing direct cost per unit improve profitability?
why:
increase the value added per unit sold
higher profit margin on each item produced and sold
customers do not notice a change in price
will it work:
yes of suppliers can be persuaded to offer better prices
yes if quantity can be improved through lower wastage
yes if operations can be organised more efficiently
why it might not work:
lower input costs might mean lower quality inputs - which can lead to greater wastage
customers may notice a decrease in product quality
2.3.1 Profit
How can increasing production output improve profitability?
why:
provides greater quantity of product to be solld
enables business to maximise share of market demand
spreads fixed costs over a greater number of units
will it work:
yes if the extra output can be sold ( e.g. finding a new market, offering a lower price for a more basic product )
yes if the business has spare capacity
why it might not work:
a dangerous option - what if the demand is not there?
fixed costs might actually rise ( e.g. stepped fixed costs )
production quality might be compromised ( lowered ) in the rush to produce more
2.3.1 Profit
How can reducing fixed costs improve profitability?
why:
a drop in fixed costs translates directly into higher profits
reduces the break-even output
often substantial savings to be made by cutting unnecessary overheads
will it work:
yes provided costs cut affect quality, customer service or output
a business can nearly always find savings in overheads
why it might not work:
might reduce ability of business to increase sales
intangible costs - e.g lower morale after making redundancies
2.3.1 Profit
What are other ways in improving profitability?
reduce product range
- business often has too many products = complete operations & inefficiency
- some products may be bery low margin or event loss-making
Outsource non-essential functions
- a way of reducing fixed costs
- focus the business on what it is good at
- areas to outsource e.g IT, call handling, finance
2.3.1 Profit
What is profit?
profit is recorded straight away
a business can trade for many years without profiy
to improve profitability a business must either increase their revenue or reduce their cost
