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Managing Finance

Theme 2

QuestionAnswer
What are the internal causes of Business Failure? Poor planning e.g. Inaccurate cash-flow forecasts/Inadequate resources Badly organised e.g. Poor stock control/Inefficient labour/Bad customer service Cash-flow/liquidity problems
What are the external causes of Business Failure? Economic environment e.g. Recession of 2012 Changing social trends e.g. Online shopping Demographic changes e.g. Ageing population may have less disposable income Political environment e.g. Changes to tax rates/ VAT back up to 20%
What are profits? Profits are the surplus of revenue over costs
What is the formula for profit? Profit = total revenue – total costs
What is a statement of comprehensive income? A formal financial document that summarises a business’ trading activities and expenses to show whether it has made a profit or loss
What are costs of sales? Costs directly linked to the production of the goods or services sold e.g. raw materials
What is the formula for Gross Profit? Sales revenue – cost of sales
What is the formula for Operating profit? Gross profit – expenses
What is an exceptional item? Any unusually large or infrequent transaction
What is the formula for profit for the year? Operating profit - interest and taxation
What is Gross Profit Margin? Gross profit margin (GPM) is a measure of a firm’s profitability by looking at the relationship between gross profit and sales revenue
What is the formula for Gross Profit Margin? Gross profit x 100/ Sales revenue
What is Operating Profit Margin? Operating profit margin (OPM) is a measure of a firm’s profitability by looking at the relationship between operating profit and sales revenue
What is the formula for Operating Profit Margin? Operating profit x 100/Sales revenue
What is Profit for the End of Year? Profit for the year margin is a measure of a firm’s profitability by looking at the relationship between profit for the year and sales revenue
What is the formula for Profit for the Year Margin? Profit for the year x 100/ Sales revenue
If GPM is low or falling what may this indicate? That a firm is not managing its cost of sales effectively e.g. are the cost of raw materials increasing? Sales are in decline
If OPM is low or falling what may this indicate? That a firm is not managing its expenses effectively e.g. wages are increasing or overheads are going up Sales are in decline
If the profit for the year margin is low or falling what may this indicate? Gross profit or operating profit are in decline Interest rates have changed Taxation rates have changed
How can a business improve profitability? Sell the same quantity but at a higher price Sell more at the current price Sell the same at the same price but reduce costs
What are the problems of increasing profitability by raising the selling price? Will you lose customers? What price do competitors charge? How loyal are your customers?
What are the problems of increasing profitability by raising the selling price? Will you gain new customers at a higher selling price? Can you attract new customers from your competitors? Is there a new market you can enter?
What are the problems of increasing profitability by selling the same at the same price but cutting costs? Will quality be affected? Will image be tarnished?
Why might cash and profit be different? Credit Sales Bad debts
What is the statement of financial position (balance sheet)? A formal financial document that summarises the net worth of a business at a given point in time It balances net assets with total equity
What are non current assets? Likely to be kept by the business for more than one year e.g. Vehicles/Premises/Machinery
What are current assets? Likely to be turned into cash within a year e.g. Inventories/Accounts Receivable (Debtors)/Cash and Cash Equivalents
What are assets? Assets are items of value owned by a business
What are liabilities? Liabilities are the money a business owes i.e. debts
What are Non – current liabilities? Debts that the business has more than one year to repay e.g. Bank loans/Mortgages
What are Current liabilities? Debts that the business may have to repay within one year Overdrafts Accounts Payable (Creditors)
What is the formula for Net Assets/Net Worth? All assets (Non current assets + Current assets) - All liabilities (Non current liabilities + Current Liabilities)
What is the formula for Total Equity? Capital + Retained Profit - Drawings
What is liquidity? A measure of a firms short term survival i.e. its ability to meet short term debts and day to day expenses
What is the formula for the Current Ratio? Current assets/current liabilities
What is the formula for Acid Test Ratio? Liquid assets/current liabilities
Why is stock removed from the Acid Test Ratio? Inventory is not included in current assets as it is deemed the hardest to turn into cash quickly
What does a Current Ratio result of 0.716 : 1 mean? For every £1 of Current Liabilities the firm owes it owns £0.716 in Current Assets
How can businesses improve liquidity? Sell assets that are no longer being used i.e. turn them from a non-current assets to a current asset (cash) Switch to long term sources of finance Monitor debtors to avoid bad debts
What is Working Capital? A measure of a firm’s liquidity / ability to meet day to day expenses
What is the formula for Working Capital? Current assets – Current liabilities
What question does Working Capital answer? Working capital answers the basic question if the firm had to pay off all its short term debts could it do so out of its short term cash resources i.e. inventories, payables and cash. If not then it will have to sell non-current assets to pay its debts.
How does having a fast stock turnover affect the Acid Test Ratio? With a fast stock turn, the ratio can be less than one e.g. a supermarket will have a fast stock turnover and a acid test ratio of less than one
An acceptable Current Ratio result is in between 1.5. and 2:1. However, recently it has begun to fall. Why? In recent years the current ratio has begun to fall as many firms move towards Just In Time production techniques. They have less stock.
How can large firms survive with low liquidity? Large firms may be able to survive with low liquidity because they may be able to pressurise suppliers and delay payments
Created by: durquhart1