2.3

• Higher gross profit margins mean that:

  it may be increased by raising revenue

  May be increased by cutting the cost of sales

  will vary between industries
• When operating profit increased it means:


  the company is earning more per pound in sales, shows the profitability of sales resulting from a regular business
• Ways to improve profitability

  Raise prices

  Lower costs

  Use existing resources more effectively
• Statement of comprehensive income


  Financial document which shows a company income and expenditure over a particular time period, usually in one year
• Non current assets


  Long term resources which will be repeatedly by the business over a period of time
• Current assets


  Changed into cash within 12 months
• Current liabilities


  Any money which is owed within one year
• Non current liabilities


  Relate to long term loans which are owed by the business that does not have to be repaid at least one year
• Shareholders equity


  Provides a summary of what is owed by the owners of the buiness
• Measuring liquidity


  Important to meet its short term debts because it means the business will have enough liquid resources to pay the immediate bills. Failure could result to a collapse in the business
• Current ratio


  under 1.5 - not enough working capital and they are over borrowing or over trading

  between 1.5.1 and 2.1 - sufficient liquid resources
• Acid test ratio


  Where there is no guarantee that stock will be sold and that they may deteriorate.

  If its less then 1:1 then its current assets minus the stock do not cover current liabilities
• Working capital


  the amount of money needed to pay for day to day trading. Needed because its to pay expenses such as wages , electricity and buy components to make products.
• Managing working capital


  size of business - Larger business, larger working capital

  Stock levels - different companies, different stock levels

  Debtors and creditors - time between buying stock financed and selling the product. Few business can be fortunate enough to be able to operate with negative working capital so typically business need around twice the amount of the current assets as they do of liabilities

  adequate levels of working capital
• Importance of cash


  Most liquid of all business assets
• Ways to improve liquidity


  use overdraft facilities

  Negotiate long/short term loans

  Encourage cash sales and sell of stocks

  sale and leaseback

  essential purchases

  Reduce personal drawings from the business

  Introduce fresh capital - Eg taking out a loans or using savings
• Internal causes of business failure


  Lack of planning

  Cash flow problems

  • Overtrading
  • investing too much in fixed assets
  • Allowing too much credit
  • Over borrowing
  • Seasonal factors
  • Unforeseen expenditure
  • External factors
  • Poor financial management

  Lack of funds

  Marketing problems

  Failure to innovate

  Lack of business skills

  Poor leadership
• External causes of business failure


  Competition

  Changes in legislation

  Changes in consumer taste

  Changes in market price