Summary Chapter 3 - Managing Finance: AS level edexcel business studies revision summaries

Borja Jimenez Business Barry



MANAGING FINANCE (3)
UNIT 2

Contents
MANAGING FINANCE (3).......................................................................................................................1
PROFIT (34)........................................................................................................................................1
STATEMENT OF COMPREHENSIVE INCOME...................................................................................1
WAYS TO IMPROVE PROFITABILITY................................................................................................2
LIQUIDITY (35)...................................................................................................................................3
STATEMENT OF FINANCIAL POSITION (BALANCE SHEETS).............................................................3
MEASURING LIQUIDITY..................................................................................................................4
IMPROVING LIQUIDITY...................................................................................................................5
WORKING CAPITAL........................................................................................................................5
BUSINESS FAILURE (36)......................................................................................................................6
PROFIT (34)
WAYS TO INCREASE PROFIT
 Adjust the marketing strategy:
o Invest more in advertising
o Invest in new promotional campaigns
o Exploiting new distribution channels
o Increase commissions to sales staff
o Improve customer targeting using social media
o Accept a wider range of payment methods
o Encourage people to buy larger amounts or repeat purchases more regularly
 Find new market: a business could generate more sales by finding new markets for its
products. Some businesses may increase profits by selling to overseas markets
 Diversify: a business can increase its revenue by extending their product line and product
portfolio
 Mergers and takeovers: some businesses try to grow quickly and lower costs by exploiting
economies of scale
 Disposal of non-profitable activities: some businesses may be in a position where they can
increase profit by getting rid of poorer performing parts (departments) of their business

STATEMENT OF COMPREHENSIVE INCOME
This is a financial document showing a firm’s income and expenditure in a particular time period; it is
mainly used to calculate profits.

KEY TERMS
 Cost of sales: refer to the direct costs related to the production of a good or the supply of a
service
 Gross profit: profit made before expenses or overheads are subtracted.

GROSS PROFIT= REVENUE – COST OF SALES



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, Borja Jimenez Business Barry


 Administrative expenses: general expenses; these might include office salaries, telephone
bills
 Revenue: money that businesses receive from selling goods and services
 Other operating expenses: any expenses not included in administrative costs
 Selling expenses: a range of expenses that are directly related to the selling of products…
(e.g., commission)
 Operating profit: gross profit subtracted administrative costs and other expenses. This is the
profit generated from the firm’s main activities.

OPERATING PROFIT= GROSS PROFIT – EXPENSES

 Finance costs: if a business borrows money it will have to pay interest. However, a business
may also receive interest if it has money in deposit accounts, finance income
 Profit of the year: if the cost of finance is subtracted from the operating profit, the profit of
the year is determined. This is the profit before taxation.

PROFIT OF THE YEAR= OPERATING PROFIT – COST OF FINANCE

Profit of the year after taxation: the amount of money that is left over all expenses. Including
taxation, has been subtracted from revenue
MEASURING PROFITABILITY
 Gross profit margin: shows the relationship between gross profit and revenue (sales). It
measures how well the costs of sales are managed.

GROSS PROFIT MARGIN = GROSS PROFIT / SALES REVENUE X 100

The higher the percentage margin the better. The margin can be improved by increasing
sales or by decreasing the cost of sales

 Operating profit margin: measures the relationship between operating profit and revenue.
It shows how successful a business is when controlling their overheads (expenses). It is also
used to measure a company’s pricing strategies and operating efficiency

OPERATING PROFIT MARGIN = OPERATING PROFIT / SALES REVENUE X 100

Again, the higher the percentage the better. It can be improved by increasing sales or by
reducing overheads.

 Profit of the year (net profit margin): this considers finance costs and any exceptional items.
Again, the higher the percentage the better. It focuses on the bottom line of the SOCI.

NET PROFIT MARGIN = NET PROFIT BEFORE TAX / REVENUE X 100

WAYS TO IMPROVE PROFITABILITY
 Raising prices: if a business raises prices, it will gain more revenue per unit sold; profit
margins are increased. However, this might mean sales might fall, as when price is raised
demand decreases
 Lowering costs:
o Cheaper resources: it might be possible to buy raw materials and components from
suppliers that offer better prices. It may also be possible to find new providers of
essential services, or by finding cheaper labor. In contrast, all of these may have

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