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Unit 2 - Profit and liquidity :star: - Coggle Diagram
Unit 2 - Profit and liquidity
:star:
Gross profit
= difference between revenue or turnover minus cost of sales (revenue is calculated by price X quantity)
Operating profit
= Gross profit - operating expenses
Profit of the year (net profit )
= operating profit - finance cost.
Ways to increase profit
Adjust marketing strategies - a business could invest in advertising and encourage people to buy larger amounts.
Find new markets - some businesses sell more by exploiting overseas market
Mergers and takeovers - they might choose to merge their business or take over rivals.
Statement of comprehensive income
= a financial document showing a company's income and expenditure over a particular time period.
Gross profit margin = Gross profit / sales revenue X 100
Operating profit margin = Operating profit / sales revenue X 100
Net profit margin = Net profit / sales revenue X 100
Ways to improve profitability
Raising prices - it will get more revenue for every unit sold. However, raising prices may lead to a fall in demand
Lowering costs - buying cheaper resources (may affect quality negatively ) and using existing resources efficiently (however, workers might resist new working practices)
Liquidity
Ways to improve liquidity
=
sales of assets or leaseback
- assets like property could be sell to financial specialists so the business can raise capital and still continue to use the assets.
inventory JIT
- minimise inventories as they are not likely to be very liquid so it will help to preserve cash
Importance of cash
= cash is the most liquid of all business assets. Without cash, the business would cease to exist. Running out of cash is a reason for a business to collapse.
Distinction between cash and profit
=
A business might receive cash, this would increase the balance sheet but will not affect profit.
purchases of fixed assets will reduce cash balances but will have no effect on the profit.
Statement of financial position
Non current assets = long term resources that will be used repeatedly (land)
Current assets = assets that will be changed into cash within 12 months ( inventories)
Current liabilities = sums of money owed by a business that must be paid within a year ( overdrafts)
Non current liabilities = long term loans that does not have to be paid for at least 1 year (mortgages)
Net assets= total liabilites - total assets
Current ratio = current assets / current liabilities
Acid test ratio = current assets - inventories / current liabilities
Working capital
= current assets - current liabilities