Gross profit - operating expenses (good indicator of how well the business is doing showing demand and efficiency)
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Profit for the year
Operating profit - tax and interest
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Income statement (profit and loss)
Financial document measuring the financial performance of a business and summarising its transactions over a specified period.
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Statement of financial position
Shows the assets, liabilities and net worth of a business on a given date. Known as the balance sheet.
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Profitability
the ability of a business to generate profit from its resources
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Profit Margin
Shows the percentage of turnover that is profit. It is the ratio of profit to turnover expressed as a percentage.
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3 ways to increase profitability
Sales, Costs and Productivity
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Cash
Usually in the form of money or bank deposits, some businesses would also include assets that can be easily converted into money i.e. finished products.
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Profit
The difference over a period of time between total sales revenue and total production costs.
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Overtrading
Happens when a business expands too quickly and tries to take on more business than working capital will allow.
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Liquidity
Refers to how much cash a business has and the ease with which it can pay its debts. Illiquid = needs more working capital / Insolvent = might have to stop trading.
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Assets
Everything that could be of benefit to an organisation. Those that appear on the statement of financial position are the ones that can be given a money value.
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Liabilities
Include all debts that must be repaid at some time in the future
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Fixed assets
Assets that will be of lasting value to the business (i.e. land, buildings, machinery, equipment). Capital expenditure means investing in fixed assets. Can include tangible (i.e. machinery) and intangible (i.e. goodwill, brands) items.
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Intangible assets
Have no physical existence (i.e. brands, goodwill, patents, experience). Some can be given a money value but managerial experience cannot. Can be very valuable but can vary overtime.
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Current assets
Assets that the business have for a short period of time. Inventory will be used and then sold.
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Current liabilities
Debts that the business will need to pay within a year or less (i.e. money owed to creditors, tax, overdrafts, dividends)
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Net current assets
Current assets minus current liabilities. The working capital of the business.
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Long term liabilities
Long term debts that the business will pay off over several years (i.e. mortgages and loans)
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Share capital
Counts as a liability, as does the money put into a business by a sole trader or partnership (owners equity). If the business closed they would want their money back so it is regarded as a debt to the business.
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The operating cycle (working capital cycle)
The length of time between expenditure and the inflow of cash from the sales of goods. Determines the amount of working capital needed. The longer the operating cycle, the more working capital needed.
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Internal causes of business failure
Within the business itself (i.e. lack of cash or failure to pay bills on time)
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External causes of business failure
Outside of the control of the business. If the firm is not prepared or lacks sufficient resources. This emphasises the importance of contingency planning.
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Production
When a business combines inputs, raw materials and components and processes them to produce output of goods and services (the production process)
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Productivity
How effectively productive resources are being used.
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Other cards in this set
Card 2
Front
Operating profit
Back
Gross profit - operating expenses (good indicator of how well the business is doing showing demand and efficiency)
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