2.3 Managing Finance

• profit and loss account


  a key financial statement and shows the income and expenditure of a business during the previous financial year
• balance sheet


  a 'snapshot' of the financial position of the business on a particular day, usually the last day of the financial year
• non-current assets


  the value of assets that the business has purchased and expects to keep in use for more than one year (buildings, land, machinery)
• current assets


  the value of assets that the business owns which are expected to be turned into cash within the next year (inventory)
• current liabilities


  the amounts that are owed by the business which are due to be paid within the next year (overdraft, trade credit)
• non-current liabilities


  the amounts that are owed by a business that are not due to be paid off within the next year (long-term loans)
• liquidity


  the ease with which an asset can be converted into cash
• 4 ways to improve liquidity

  1. negotiate better credit terms with supplier

  2. reduce customers credit terms

  3. better credit control

  4. overdrafts
• lack of innovation as an internal cause of business failure


  the failure to innovate is detrimental especially for those in dynamic markets
• marketing as an internal cause of business failure

  poor promotional techniques, incorrect pricing strategies or incorrect market positioning
• inefficiency as an internal cause of business failure


  as a business grows and its organisational structure becomes more complex, it can suffer from diseconomies of scale
• economic influences as an external cause of business failure

  a recession or changes toe change rates which may lead to a reduction in demand in certain businesses
• competition as an external cause of business failure

  new entrants in the market can out pressure on existing businesses. existing competitors may develop new products/more efficient techniques (competitive advantage)
• external shocks as an external cause of business failure

  a sudden and significant change in the external environment (terrorism/major health scares) can impact the demand for certain products and services
• financial causes of business failure

  1. cash flow/poor management of working capital

  2. poor communication/diseconomies of scale
• non-financial causes of business failure

  1. lack of innovation

  2. increased competition

  3. external shocks
• cost of sales


  direct costs of a business
• profitability


  the ability of a business to generate profit from its business activities tax
• tax


  charge by the government on activities, earnings and income of individuals and businesses
• gross profit


  revenue - cost of sales (VC)
• gross profit margin


  Gross profit / revenue x 100
• profit for the year

  operating profit - interest
• operating profit margin


  Operating profit / revenue x 100
• operating profit


  gross profit - operating expenses
• profit for the year margin


  Profit for the year / revenue x 100
• profit margin


  the amount by which the sales revenue exceeds the costs
• productivity


  measure of how effective a business is at using its assets to generate output
• capacity utilisation


  measure of how much of a business' capacity is being used
• current ratio


  current assets ÷ current liabilities
• acid test ratio


  (current assets - stock) ÷ current liabilities
• opportunity costs


  the alternative given up when a decision is made
• working capital


  amount of money needed to pay for the day to day trading of a business
• working capital calculation


  current assets - current liabilities
• shareholder equity


  amount of money owed by the business to shareholders
• total equity


  share capital + retained profit
• overtrading


  a business does not have enough cash to support its production and sales, usually because its growing too fast