2.3 - Cash Flow and Profit
- Created by: keithpettifer325
- Created on: 21-11-18 10:48
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- Theme 2.3.1 & 2.3.2
- 2.3.1 - Profit
- Before you know it, Your Profit is GON.
- Gross Profit = Sales Revenue - Cost of sales
- Gross Profit is the profit made after sales.
- Gross Profit Margin-(%) = (Gross Profit / Sales Revenue) X100
- Operating Profit = Gross Profit - Operating Expenses
- Operating Profit is the profit left after operating costs are paid for.
- Operating Profit Margin (%) = (Operating profit / Sales Revenue) X100
- Net Profit = Operating Profit - Interest
- Net Profit is the profit left after interest is paid off (also called profit for the year.)
- Net Profit Margin (%) = (Net Profit / Sales Revenue) X100
- Profit & Loss Accounts
- Also known as Statement of Comprehensive Income
- This document is created at the end of a financial year, and contains information about the profit or loss made by a business.
- One way to increase profitability is to raise prices, which is risky as it could increase the elasticity of a product or service, this could lead to a loss of revenue and a decrease in sales.
- Another way to increase profitability is to lower costs by either changing to cheaper suppliers or making staff redundant.
- Profit is the amount of cash a business has left over after costs. Businesses can live a long time without profit.
- Cash is the amount of money a business has before profits, a business may go bust if it runs out of cash.
- Key Terms
- An income statement measures a businesses financial performance over a period of time.
- A balance sheet shows a businesses assets and liabilities at a set moment in time.
- A cash flow statement is a document that shows how much money flows in and out of a business.
- Cost of sales can include costs of raw material and rent of premesis
- Operating costs can include utility bills and cost of advertising ,and also marketing.
- Before you know it, Your Profit is GON.
- 2.3.2 - Cash Flow
- Cash flow shows the amount of money that flows in and out of a business.
- Cash outflows are basically costs that a business pays out for.
- Cash inflows is basically the money that a business receives or generates.
- Net Cash Flow = Cash Inflows - Cash Outflows
- Net cash flow shows the difference between cash inflows and outflows over a specific period of time.
- Types of Inflows and Outflows
- Cash inflows include: Sales revenue, sales of assets, share capital investment, bank loans and government grants and other sources of finance
- Liquidity is the ability of a business to pay its costs on time.
- Ways to improve cash flow could include reducing the chain of command (delayering), changing to cheaper suppliers, changing ethics, reducing costs, increasing prices, leasing or selling assets and raising finance
- Ways to raise finance are: Factoring, selling shares, loans, overdrafts, business angels etc.
- The Balance Sheet
- Assets are what a business owns or is owed, and liabilities are what it owes.
- Non- current assets and liabilities are long term, and current assets and liabilities are short term.
- Assets and Liabilities
- Non-current assets include land, buildings, and machinery.
- Current assets include cash, trade debtors and receivables, and stocks.
- Current liabilities include trade creditors, short-term borrowing and utilities.
- Non-current liabilities include long term borrowing options such as dividends for shares.
- 2.3.1 - Profit
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