Theme 2 - 2.3

• statement of comprehensive income (SOCI):

  • financial documents showing company's income and expenditures, this is usually a 1 year period
  • also known as income statement or profit and loss
  • contains gross, operating and net profit
  • used to access profitability
• Gross profit

  • Measure of how much a business earns from sales before expenses like rent and taxes
  • cost of sales are the direct costs e.g-materails
• Operating profit

  • measure of how much a business earns before interest and tax
  • expenses are indirect costs e.g-administration
• Net profit

  • measure of how much a business earns after all costs have been subtracted
  • calculated before or after tax
  • interest is payments due to loans or debts
• Profit margins

  • measures size of profit in relation to revenue
  • businesses will want a high margin can be dependent on market, objectives,product/service (MOPS)
• Improving profitably:

  • Increase revenue - Changing price, Increase promotion, Add value to products
  • Reduce cost - Improve efficiency/productivity, Increase capacity utilisation, Negotiate cheaper prices with suppliers, Eliminate or replace unprofitable processes
• 
  

  Assets:

  • What a business owns
  • Current assets-assets that the business expects to use or sell in 1 year
  • Non-current/fixed assets -assets used to operate the business, can be tangible or intangible
• liabilities:

  • What a business owes
  • Current liabilities- payments die in 1 year
  • Non-current liabilities -debts that a business doesn’t expect to pay in 1 year
• Equity:

  • Any funds that contribute by owners
  • Will be equal to ‘net assets’
• income:

  • Includes income generated from sales or other revenue streams
  • Can also include interest accrued from loans/investments
• Expenses:

  • Includes any costs to a business
  • Cost of goods sold/operating expenses include wages, rent,administration
• Liquidity:

  • Ability of a business to turn its assets into cash, pay current liabilities
  • Cash is the most liquid assets
  • Can be measured by calculating current ratio and acid test ratio
• 
  

  Importance of sufficient working capital:

  • enough cash and liquid assets to cover short term debt
  • having sufficient working capital allows the business know it can cover year debts
  • insufficient working capital means there is higher current liabilities then there are current assets
• Disadvantage to too much working capital:

  • excesses working capital is a result of having too many assets
  • results in high ratio
  • large amounts of assets sit idle, over time it will loses its value
• buying of raw materials so production of goods can begin leads to sales to consumers who then pay up, initiating the working capital cycle.
• Ways to improve liquidity include negotiating more favourable credit with customers and suppliers, encouraging cash sales, sales and lease back of fixed assets, introducing fresh capital, selling off current assets, negotiating additional short-term loans, and restricting purchases for businesses.
• Internal causes of business failure include cash flow problems, lack of planning, skills deficit, ineffective marketing, poor leadership, and reasons related to cash flow management.
• External causes of business failure include competition, new legislation, market conditions, and economic factors.
• Causes of business failure can be financial or non-financial.
• net profit=OP-Interest
• operating profit =GP - Expenses
• Gross profit =Sales Revenue -Cost of Sales
• GPM= GP/ SR x100
• OPM =OP/ SR x100
• NPM =NP/ SR x100
• Net current assets(working capital) =current assets -current liabilities
• Net assets =total assets- total liability