2.3 - Profit Flashcards
(11 cards)
How is gross profit calculated?
Gross Profit = Revenue - Cost of Sales
How is operating profit calculated?
Operating Profit = Gross Profit - Operating Expenses
How is net profit calculated?
Net Profit = Operating Profit - Interest & One-off Costs
How do you calculate gross profit margin?
(Gross Profit ÷ Revenue) × 100
How do you calculate operating profit margin?
(Operating Profit ÷ Revenue) × 100
How do you calculate net profit margin?
(Net Profit ÷ Revenue) × 100
Name 2 ways to improve profitability.
Increase revenue (e.g. raise prices), or reduce costs (e.g. cheaper suppliers).
What is price elasticity of demand important for?
Understanding if raising prices will increase or decrease revenue.
What is the difference between profit and cash?
Profit is revenue minus costs; cash is the actual money flowing in and out of the business.
Can a profitable business still fail?
Yes, if it runs out of cash to pay its suppliers and bills
Here’s a flashcard set based on your notes on the Statement of Financial Position (Balance Sheet) and Liquidity for A-Level Business:
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Flashcards: Statement of Financial Position & Liquidity
Basics of Statement of Financial Position
Q: What is the Statement of Financial Position also known as?
A: The Balance Sheet.
Q: What does the Statement of Financial Position show?
A: The financial structure of a business at a specific point in time, including assets, liabilities, and capital.
Q: What does it help assess in a business?
A: Liquidity – the ability to meet short-term obligations.
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Liquidity
Q: What is liquidity?
A: A business’s ability to meet short-term commitments with available assets.
Q: Why is liquidity important?
A: Without it, a profitable business may still fail if it can’t pay its bills.
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Liquidity Ratios
Q: What are the two main liquidity ratios?
A: The current ratio and the acid test ratio.
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Current Ratio
Q: What does the current ratio measure?
A: How many £s of current assets are available to cover each £1 of short-term debt.
Q: What is the formula for the current ratio?
A: Current Assets ÷ Current Liabilities
Q: Is it suitable for businesses with little stock?
A: Yes, it’s effective when stock levels are low.
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Acid Test Ratio (Liquid Capital Ratio)
Q: What is the acid test ratio?
A: A stricter measure of liquidity that excludes inventory.
Q: What is the formula for the acid test ratio?
A: (Current Assets - Inventory) ÷ Current Liabilities
Q: When is this ratio especially useful?
A: For businesses with a large amount of stock.
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Ways to Improve Liquidity
Q: How can a business improve liquidity? (Name 3)
A: Use cash flow forecasts, budget effectively (e.g. zero budgeting), and reduce costs/increase income.
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Liquidity Improvement Methods
Q: How does reducing customer credit periods help?
A: It increases current assets by speeding up cash collection.
Q: How does extending supplier repayment periods help?
A: Keeps cash in the business longer (though suppliers may object).
Q: What’s the impact of using overdrafts or short-term loans?
A: Increases cash (but also liabilities); may be hard to get if struggling.
Q: How does selling excess stock help liquidity?
A: Converts less liquid assets (stock) into cash, reducing storage costs.
Q: What is sale and leaseback?
A: Selling assets and leasing them back; increases cash but adds ongoing costs.
Q: How does introducing new capital help?
A: Brings in cash; may dilute ownership/control.
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Working Capital
Q: What is working capital?
A: The money a business has to fund daily operations.
Formula: Working Capital = Current Assets - Current Liabilities
Q: Why is working capital important?
A: Without it, a business can’t meet day-to-day financial obligations.
Q: What’s the most liquid current asset?
A: Cash – can immediately settle debts.
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Managing Working Capital
Q: How can businesses manage working capital effectively? (Give 2 methods)
A: Speed up payments from debtors, request longer payment terms from suppliers.
Q: What are risks of holding too much working capital?
A: Missed investment opportunities, high storage costs, opportunity cost.
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Common Exam Tip
Q: What’s a common mistake students make about working capital?
A: Confusing it with cash – working capital includes less liquid assets like inventory and receivables.
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