Business Financial Formulas and Concepts

Flashcards on liquidity ratios, cash flow measures, break-even point, margin of safety, and contribution formulas.

Current ratio

Calculated as $\frac{\text{Current Assets}}{\text{Current Liabilities}}$. This shows the ability of a business to pay its short-term debts from its current assets.

Acid test ratio

Calculated as $\frac{\text{Current Assets} - \text{Inventories}}{\text{Current Liabilities}}$. This shows the ability of a business to pay its short-term debts from its current assets - inventories.

Net cash-flow

Calculated as $\text{Cash inflows} - \text{cash outflows}$. This is the difference between cash inflows and outflows in a time period, e.g., a month.

Closing balance

Calculated as $\text{Opening balance} + \text{net cash-flow}$. This is the amount of cash a business has in the bank at the end of a period, e.g., a month.

Break-even

Calculated as $\frac{\text{Fixed Costs}}{\text{Contribution per unit}}$. This is the point where $\text{total revenue} = \text{total costs}$; neither a profit nor loss is made.

Margin of safety

Calculated as $\text{Current output} - \text{break-even output}$. This is the amount by which sales exceed the break-even level of output.

Contribution

Calculated as $\text{Selling price} - \text{Variable Cost}$.