There are 3 main financial documents you need to know, one looks backwards, one records the current financial position of the business and one predicts the future. Name them.
Profit and Loss Account looks back
Balance Sheet is the present position
Cash Flow forecast looks fortward
Define a cash flow forecast
A prediction of the cash in and the cash out of a business over time
Define a balance sheet
A snapshot of the assets and liabilities in a business at a particular point in time
Define a profit and loss account
A financial record of the profit or loss made in the previous year by the business after all costs have been taken away from the income sources
What are the 3 sections of a profit and loss statement?
Trading Account, Profit and loss account, appropriation account
The Trading Account summarises the Gross Profit, how is this worked out?
Revenue - Cost of Sales
How is Cost of Sales worked out?
Opening Stock - Closing Stock + stock purchased
The Profit and Loss account summarises the Net Profit, how is this worked out?
Gross Profit - Operating Costs
Give examples of operating costs
Admin, marketing, utilities, rent
The Appropriation Account summarises what happened with any profit made. What are the 2 options?
Retained Profit (ie banked for next year) and Shareholder dividends
If opening stock is £100, £200 stock is bought and £50 stock is left. What was the cost of sales?
£250
In a cash flow forecast, what happens to the closing balance each month?
It is carried forward to the opening balance the following month
In a cash flow forecast, how do you work out the net cash flow each month?
Cash in - cash out
Why does a negative balance cause a business problems?
The business is unable to pay the bills and this can cause the business to go bankrupt and stop operating
Give suitable sources of short term finance for a business with cash flow problems
Overdraft, Trade credit, not family and friends
What is gross profit margin and how do you work it out?
The proportion of gross profit that is made on each sale. Gross profit/sales x 100
What is net profit margin and how do you work it out?
The proportion of net profit that is made on each sale. Net profit/sales x 100
How does a business improve a gross or net profit margin?
reduce cost of sales if it is a low GPM or reduce operating costs if it is a low NPM.
What is the break even point?
The number of sales when the revenue is exactly the same as the total costs
What is the formula for the break even point?
Fixed costs/contribution
What is contribution?
Selling price - variable costs in other words the amount left over of each sale that pays the variable costs
If selling price is £10 and variable costs is £2, what is the contribution?
£8
When drawing a break even chart, which line is a horizontal line no matter how many sales are made?
fixed cost
Which two lines of the break even cross to show the break even point?
Total Revenue and Total Costs
