2.3 : Managing Finance

A set of practice flashcards covering key vocabulary, formulas, and concepts regarding profit, liquidity, and business failure based on Edexcel A Level Business notes.

Gross Profit (GP)

The difference between revenue and the costs directly related to production.

Operating Profit (OP)

The difference between the gross profit and the indirect expenses involved in operating the business.

Net Profit (NP)

The difference between the operating profit and any interest paid and received, as well as any one-off costs.

Gross Profit Calculation

$$\text{GP} = \text{revenue} - \text{cost of sales}$$

Operating Profit Calculation

$$\text{OP} = \text{gross profit} - \text{operating expenses}$$

Net Profit Calculation

$$\text{NP} = \text{operating profit} - (\text{net interest} + \text{exceptional costs})$$

Statement of Comprehensive Income

An end-of-year financial statement that shows all of a business's income and expenses over the previous 12 months.

Profit Margin

The amount by which the sales revenue exceeds the costs, often expressed as a percentage of revenue.

Gross Profit Margin

Shows the proportion of revenue turned into gross profit, calculated as $\frac{\text{Gross profit}}{\text{Revenue}} \times 100$

Operating Profit Margin

Shows the proportion of revenue turned into operating profit, calculated as $\frac{\text{Operating profit}}{\text{Revenue}} \times 100$

Net Profit Margin

Also known as the profit for the year margin, calculated as $\frac{\text{Profit for the year}}{\text{Revenue}} \times 100$

Profit vs. Cash

Profit is the difference between revenue generated and business costs, while cash is the full range of money flowing in and out of a business.

Trade Credit

An arrangement where a business can receive stock immediately and pay for it at a later date, typically after 30 or 60 days.

Liquidity

The ability of a business to meet its short-term commitments, such as payments to creditors, with its available assets.

Statement of Financial Position

Also known as the balance sheet, it shows the financial structure of a business at a specific point in time by identifying assets, liabilities, and capital.

Current Ratio

A liquidity measure showing how many pounds of current assets are available to cover each $£1$ of short-term debt, calculated as $\frac{\text{Current assets}}{\text{Current liabilities}}$.

Acid Test Ratio

Also known as the liquid capital ratio, it provides a realistic measure of liquidity by deducting inventory from current assets.

Acid Test Ratio Formula

$$\frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}} = \text{? : 1}$$

Working Capital

The money a business has to fund its day-to-day activities, often described as net current assets on the statement of financial position.

Working Capital Formula

$$\text{Working capital} = \text{Current assets} - \text{Current liabilities}$$

Current Assets

Short-term assets such as inventories, trade receivables, and cash.

Current Liabilities

Short-term debts such as short-term loans and trade payables.

Internal Causes of Business Failure

Factors within the business's control such as ineffective marketing, lack of leadership, or lack of funds.

External Causes of Business Failure

Factors beyond a business's direct control, including changes in legislation, economic challenges, and the entry of new competitors.

Price Inelastic Demand

A market condition where increasing prices will increase revenue, thereby increasing profitability if costs remain the same.