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2.3 Managing Finance - Coggle Diagram

- - - - Profit
        
        Net profit is what is left after all the costs of a business have been taken from it's revenue
        
        Net profit = operating profit - interest
      - Profit margin
        
        This looks at profit after tax as a percentage of sales revenue and measures how effective the business is at turning sales into profit. It can help set profit to decide pricing strategies etc..but does not indicate how many sales have been made
        
        Net profit margin = net profit/revenue x 100
    - - Profit
        
        Operating profit is how much profit has been made after the subtraction of operating expenses alongside fixed costs. This could be office salaries or advertising
        
        Operating profit = gross profit - other operating expenses
      - Profit margin
        
        This is operating profit as a percentage of sales revenue. A high operating profit margin indicates that a business has good control over it's costs or that the produce commands a high price. A low margin would mean that a business would need to raise prices
        
        Operating profit margin = Operating profit/revenue x 100
    - - Profit
        
        Gross profit is vital as it must be enough to cover the fixed costs, and leave enough profit for shareholders
        
        Gross profit = revenue - cost of sales
      - Profit margin
        
        This is used to asses a businesses proportion of money left over from revenue, after taking into account the costs of goods sold
        
        Gross profit margin = gross profit/revenue x 100
  - - - Allows shareholders to see the businesses performance so they can judge if the figures are acceptable
      - Helps identify if the profit made by the business over the time period is sustainable
      - It can be compared to other business's statement of comprehensive income's
  - - - Improve sales by increasing the quantity of products sold, or increase the selling price
      - Reduce variable costs by reducing the variable cost per unit
      - Decrease fixed costs by cutting admin or management posts, and unnecessary overheads
- - - - Current ratio
        
        This shows the businesses ability to pay it's bills within the next 12 months, and an ideal ratio is between 1.5 and 2.0
        
        Current ratio = current assets/current liabilities
        
        If the number is below 1, then the business will struggle to pay off it's debts for any given period of time
      - Acid test ratio
        
        This is a more severe test to see if a business has the ability to pay it's debts. it assumes that stock is perishable and it may go out of date, out of fashion or just obsolete in general
        
        A value of 1 is considered good, but anything less than 1 and the business is in trouble as the business may be keeping stock for too long
        
        Acid test ratio = current assets-stock/inventory
  - - - Internal factors, such as poor stock management and delays in production, or offering longer credit terms to customers
      - External causes, such as a customer losing their job and leaving unpaid debts to the business, or external shocks such as a recession
    - - Reduce the period of time stock is held once it has been created from raw materials
      - Improve the efficiency of production so the product can get to customers quicker
      - Reduce the credit period offered to customers
- - - - Marketing failure - Where the business has not done enough to know its audience and anticipated change within the market. For example, setting a higher price than customers are willing to pay
      - Financial failure - Where the business has failed to successfully forecast sales and sustain a strong capital coming into and out of the business
      - A systems failure such as IT or production failure - If vital machinery is broken and product cannot be sold or used in any other way, it can be extremely damaging for a businesses survival
    - - The dynamic market change giving a rival a competitive advantage - In a market where there is constantly new and exciting products, demand can drop significantly if businesses cannot keep up
      - A recession - Where customer's disposable income drops and reduces demand for an income elastic product, where a change in income affects the price
      - A change in legislation which affects supply/demand - For example the rise in minimum wage might be too much for businesses to pay out, causing failure
  - - - Operating below break-even point
      - Insufficient cash flow
    - - Lack of management
      - Not developing a business plan/forecast
      - Failure to understand markets and key customers
      - Failure to administer the business properly
      - Caught breaking legislation