2.3 Managing Finance

How do you calculate gross profit?
Revenue - cost of sales
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How do you calculate operating profit?
Gross profit - fixed overheads
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How do you calculate profit for the year?
Operating profit - financing and tax
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How do you calculate gross profit margin?
Gross profit / sales revenue x100
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How do you calculate operating profit margin?
operating profit / sales revenue x100
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How do you calculate net profit margin?
profit for the year / sales revenue x100
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What are the ways of increasing profitability?
Increase the price, cut costs
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What is the difference between profit and cash (calculation)
Profit is sales - variable costs - fixed costs = net profit. Cash flow is cash inflow - cash outflows = net cash flow
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What is a balance sheet?
Shows what the company owns and what it owes
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How can a balance sheet measure liquidity?
It takes the firms current liabilities and works out if their current assets can cover the costs
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How do you calculate current ratio?
Current assets / current liabilities
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How do you calculate acid test ratio?
(current assets - inventories) / current liabilities
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What are the ways to improve liquidity?
Selling under-used fixed assets, raising more share capital, increasing long-term borrowings, postponing planned investments, improve the management of working capital
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Why is cash so important?
Without it businesses fail, might not be able to bulk buy, high risk if low on cash, might have to refuse a large order if they can't finance more equipment
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What are internal causes of business failure?
A marketing failure, a financial failure, a systems failure
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What are external causes of business failure?
A change in technology that gives rival an advantage, new competitor, economic change, the behaviour of banks
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What are financial causes of business failure?
Business running below break-even point for too long, cash flow crisis, overtrading
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What are non-financial causes of business failure?
Sudden lurch in sales towards competitors, a steady drip-drip of sales decline as the business loses its competitiveness
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Other cards in this set

Card 2

Front

How do you calculate operating profit?

Back

Gross profit - fixed overheads

Card 3

Front

How do you calculate profit for the year?

Back

Preview of the front of card 3

Card 4

Front

How do you calculate gross profit margin?

Back

Preview of the front of card 4

Card 5

Front

How do you calculate operating profit margin?

Back

Preview of the front of card 5
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