Business Y12 Unit 2

total revenue formula

price x quantity sold

cost of sales

known as direct costs. (examples: raw materials, packaging, salaries of baristas)

expenses

known as indirect costs. (examples: salaries of cleaning staff, utilities, advertising, fuel)

non current assets

used more than 1 year (examples: property, buildings, equipment, machinery, vehicles)

current assets

converted into cash within 1 year (examples: cash, debtors, stock)

current liabilities

debts that must be settled within 1 year. (examples: overdraft, trade creditors, other short term loans)

non current liabilities

debts due to be repaid after 1 year. (examples: bank loans, mortgages, debentures, long term borrowings)

assets

items of monetary value that are owned by a business

liabilities

legal obligations of a business to repay its lenders or suppliers at a later date

equity

shows the value of the business belonging to the owners

share capital

the amount of money raised through the sale of shares

retained earnings

amount of profit per period after interest, tax and dividends have been paid, that has been reinvested back into the business

depreciation

method of spreading the purchase costs of fixed assets over their useful lifespan

ratio analysis

quantitative management tool for analysing and judging the financial performance of a business. can be compared with time periods or with other businesses

profitability ratios

examine profit in relation to other figures

• gross profit margin

• net profit margin

• return on capital employed

Gross profit margin

shows the value of gross profit as a percentage of sales revenue. higher the GPM = more gross profit to go towards paying expenses

profit margin

shows the value of net profit as a percentage of sales revenue. analyses the profitability of a firm after deducting indirect costs from gross profit. higher PM = more profit to go towards dividends and retaining profit

ROCE

measures the financial performance of a firm compared with the amount of capital invested. higher ROCE = more efficient at generating profit from available funds

Liquidity ratios

ability of firm to pay its short-term liabilities

• current ratio

• quick/acid-test ratio

current ratio

deals with liquid assets and short term liabilities. reveals whether a firm can use its liquid assets to cover its short-term debts. ideal benchmark is 1.5 to 2 : 1

quick ratio

like current ratio except it ignores stock when measuring short term liquidity of a business. ideal benchmark is 1:1

working capital

day to day expenditures include items such as paying for utilities, wages, raw materials

liquidity

refers to how easily an asset can be turned into cash

closing balance formula

opening balance + net cash flow

average rate of return

calculates average profit on an investment project as a % of the amount invested

net present value

work out present value of the return on an investment

efficiency ratio

shows how well a business utilises its resources

stock turnover

rate at which a company’s goods are sold and replaced

debtor days

number of days that a company needs to collect cash payments from its customers (30-60 days best)

gearing ratio

how much % of money is borrowed. over 50% is bad, too low is bad as well

crowdfunding

raising finance from many individuals for a small amount of money

gross profit formula

total revenue - cost of sales

gearing ratio results

below 50% is reliance on shareholder capital, above 50% is reliance on loan capital

debtor days results

aim for lower the better, indicates more efficiency in collecting debts from customers

creditor days results

aim for higher the better, indicates good negotiation for extended credit terms with suppliers

working capital formula

current assets - current liabilities