2.3 Managing finance

Cash

An asset of a business which can come from investors, lenders or costumers.

Cost of sales

the cost of inventory bought or produced.

Gross profit (formula)

Revenue - cost of sales

Gross profit margin (formula)

Gross profit/Sales of revenue x 100

Operating profit (formula)

Gross profit - other operating expenses

Operating profit margin (formula)

Operating profit / Sales revenue x 100

Profit (+formula)

Is recorded straight away after sales. (Total revenue - total costs)

Profit for the year/net profit (F)

Operating profit - interest

Profit for the year margin (F)

Net profit / Sales revenue x 100

Profitability

Profit as a proportion of sales.

Statement of comprehensive income

A document to show income and expenditure of a business over a financial year.

Tax

A charge made by governments on activities, earnings and income of individuals and businesses.

Acid test ratio (F)

Current assets - Inventory / Current liabilities

Assets

Valuable things that a business can use.

Capital

Cash put into the business by the owner.

Current assets

Liquid assets, those assets that will be converted into cash within 12 months e.g. inventories, trade receivables and cash.

Current liabilities

Debts owed by a business that must be repaid within one year.

Current ratio

Current assets / Current liabilities

Liabilities

Debts owed by a business to lenders and suppliers.

Liquidity

The ability to pay bills in cash when the fall over due.

Net assets (F)

Total asset - Total liabilities

Non current assets

Long term resources that will be used by the business for more than one year.

Non current liabilities

Debts owed by the business for more than one year.

Shareholders equity

The value of the shareholders’ investment in a business.

Statement of financial position / Balance sheet

A summary at a particular point in time of the value of a firms assets, liabilities and equity

Total equity (F)

share capital + retained profit

Working capital

Working capital is the difference between the current assets and current liabilities of the business. It gives some indication of the liquidity level within the business.

External causes for business failure

The factors outside the control of a business which might cause it to fail, e.g. competition, legislation, customers tastes and economic conditions

Financial factors for business failure

Factors which may contribute to a business running out of cash, e.g. late payments, inability to borrow

Internal causes for business failure

Factors which a business can control e.g. poor decision-making, loss of key staff

Non financial factors for business failure

can come from inside or outside the business e.g. poor management, external shocks

Overtrading

The situation where a business does not have enough cash to support its production and sales, usually because it is growing too fast