2.3

Gross profit

Revenue- cost of sales

Operating profit

Gross profit- expenses (cost of running business)

Net profit

Operating profit- financial costs (tax/inerest)

Profit margin

Profit/ revenue x 100

Difference between profit and cash

Cash refers to teh money that flows in and out the business within a specific time frame (day to day spending), profit is what’s left of your revenue once you’ve deducted your levels of cost

Measuring liquidity- current ratio

Current ratio: identifies wether a business can pay back short term debts- current assets/ current liabilities

Ideal ratio is 2.0 (£2 assets to £1 debt)

Measuring liquidity: acid test

More accurate measure of liquidity, takes out stock involves cash and debtors

Current assets-stock/ current liabilities

Ideal ratio is 1.4 (1.1-1.5)

Ways to improve liquidity

Encourage cash sales

destocking

Negotiate longer credit terms with suppliers

Delay payements

Use overdraft

Working capital

Day to day running Costs

Current assets- current liabilities

Internal reasons for failure

Lack of planning

Lack of funds

Poor leadership

Cash-flow problems

Marketing problems

External reasons for business failure

Change’s in legislation

Economic climate

Competition

Change’s in market prices