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Flashcards in 2.3 managing finance Deck (30)
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Define profit

The difference between the revenue and costs generated by a business over a period of time


What is the formula for gross profit

Total revenue - Cost of sales


What is the formula for operating profit

Gross profit - fixed overheads


Define fixed overheads

Costs which have to be paid no matter how well the business is performing

E.g. Salaries and rent


What is the formula for net profit

Operating profit - (net financing costs and corporation tax)


What are net financing costs

The income from interest minus the interest charged on loans and overdrafts


What are the ways to improve profit

Increase revenue
Reduce costs

There is often a trade off between the two


What is a statement of comprehensive income

A document produced by a PLC to show a break down of revenue, cost and profit for a year


Define profitability

States profit as a percentage of sales revenue


What is the formula for gross profit margin

Gross profit / sales revenue X 100 %


What is the formula for operating profit margin

Operating profit / sales revenue x 100 %


What is the formula for Net profit margin

Net profit / sales revenue x 100%


What do profit margins mean

The higher the profit margin the better it is for the business


What are ways to improve profitability

Increase selling price

Cut costs


Why is profit no the same as net cash flow

Sales revenue does not equal cash inflows

Costs do not equal cash outflows


Define Liquidity

The ability for a business to find the cash it needs to pay its bills


What is a balance sheet

A document describing the financial position of a business , comparing what it owns (assets) and what it owes (liabilities)


What is a current asset

Are assets which are cash or can be easily turned into cash


What is a current liability

Are debts owed by a business that are to be paid in one year


What is the formula for the current ratio

Current assets / Current liabilities


What is the formula for the acid test ratio

(Total current assets - Inventories) / current liabilities


What are ways of improving liquidity

Selling under used fixed assets (equipment or machinery)
Raising more share capital
Increasing long term borrowing through loans
Postponing planned investments


Define fixed assets

Items used by a business which is used to generate profits


Define profitability

The profit as a percentage of sales revenue


What is working capital

Why is it essential

The money available for the day to day running of the business

Is it needed to make sure a business can operate and pay for materials, labour, capital


What is an income statement

A financial document from a business of the gross profit, operating profit and net profit


What is business failure

Where a company fails due to its inability to make profits or cover its expenses


What are the internal causes of market

Give examples

Marketing failure (poor decisions in the marketing mix)

Financial failure ( cash flow crisis)

Operations failure (physical systems break down)

Poor leadership (bad decisions)


What are the external causes of business failure

Give examples

Change in technology (competitors have new tech to produce faster)

New competitor (could operate more effectively)

Economic change (economy may fall, decreased demand)

Behaviour of banks (can charge higher interest rates)


What is the acid test ratio

It is used as an indicator as to whether a firm has sufficient current assets to cover its current liabilities