2.3- Managing Finance

• • gross profit = revenue cost of sales
• gross profit margin= gross profit/revenue x 100
• operating profit= revenue- operating expenses
• operating profit margin= operating profit/revenue x 100
• net profit= gross profit - expenses - taxes
• net profit margin = net profit/revenue x 100
• profit = revenue - costs
• profit is money left over after all costs have been deducted
• cash is the most liquid asset and is the easiest to convert into cash
• Ways a business can improve profitability : reducing costs, increasing selling price, negotiating with suppliers and purchasing in bulk, reduce trade credit from customers
• The components of a financial position (balance sheet): assets, liabilities and equity
• current ratio= current assets/current liabilities
• acid test ratio= current assets-inventory/current liabilities
• importance of managing working capital : reduces risk of cash flow problems, business can meet short term debts, they maintain sufficient cash flow for day to day operations
• Internal Factors of Business Failure : lack of leadership, bad planning, lack of finance, bad marketing and cash flow issues
• External Factors of Business Failure : economic factors, social factors such as changes in customer tastes, technological change, legal/ political factors and competition