2.3

• What is the formula for gross profit?

  Gross profit = Revenue - Cost of sales
• How is gross profit margin calculated?

  Gross profit margin = (Gross profit ÷ Revenue) × 100
• What is the formula for operating profit?

  Operating profit = Gross profit - Operating expenses
• What does operating profit margin represent?

  Operating profit margin = (Operating profit ÷ Revenue) × 100
• How is net profit calculated?

  Net profit = Operating profit ± Non-operating items
• What is the formula for net profit margin?

  Net profit margin = (Net profit ÷ Revenue) × 100
• What is the formula for working capital?

  Working capital = Current assets - Current liabilities
• How is the current ratio calculated?

  Current ratio = Current assets ÷ Current liabilities
• What is the ideal current ratio?

  Ideal ratio is typically between 1.5 and 2
• What is the acid test ratio also known as?

  Also known as the quick ratio
• What is the ideal acid test ratio?

  Ideal ratio is typically around 1
• What are the components of working capital management?

  • Inventory management: Optimizing stock levels
  • Accounts receivable management: Efficient collection of debts
  • Accounts payable management: Managing supplier payments
  • Cash management: Ensuring sufficient cash for operations
• What are the main causes of business failure?

  • Poor management
  • Insufficient capital
  • Overtrading
  • Changes in market conditions
  • Increased competition
• What is overtrading?

  Expanding business operations too quickly without resources
• What are the signs of overtrading?

  • Rapid sales growth
  • Declining liquidity ratios
  • Increasing reliance on short-term borrowing
• What is the difference between insolvency and bankruptcy?

  Insolvency: Unable to pay debts; Bankruptcy: Legal declaration
• What does insolvency mean?

  Unable to pay debts as they fall due
• What does bankruptcy mean?

  Legal declaration of inability to pay debts