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Summary of 2.3 - Managing Finance
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Edexcel AS/A Level Business Unit 2 - 2.3 Managing Finance Containing: Business Failure, Profit, Liquidity, Balance Sheet, Calculations
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Profit Gross Profit – the difference between revenue and the cost of sales (the
direct costs of the firm). It shows the profit made on the trading activity Topic 2.3 Managing Finance
before any other costs are taken into account.
Operating Profit – takes into account the other operating expenses on The Balance Sheet
top of gross profit. A balance sheet is a financial document that records the assets and
Profit of the Year (Net Profit) – the ‘actual’ profit the firm has made liabilities of a business. A balance sheet gives a snapshot of the value
(taking into account interest). and financial strength of a business.
Profit Margins – the values of profit alone has limited value in determining A balance sheet can be used to calculate financial ratios such as liquidity
the performance of a firm. Managers will often calculate a profit margin.
This is a ratio expressed as a percentage. It compares the profit figure to ratios, gearing ratios, and efficiency ratios.
sales revenue; in other words, the proportion of sales revenue that has
been converted into profit.
Gross Profit Margin – a useful indicator for analysing how a firm has
performed in terms of its direct trading activity.
Operating Profit Margin – takes into account the performance of a
firm fully, as the calculation takes into account direct and indirect
costs. It is a useful tool when used alongside the gross profit margin.
Net Profit Margin – this ratio takes into account all revenues and
costs incurred by the firm. It is a good measure of how the firm
performed over the financial year. This ratio may be used to identify
the potential to pay a dividend to shareholders.
Improving Profitability
Profitability can be improved through measure taken by each functional
area of the business.
There are a number of reasons why a firm might be unprofitable:
No demand for the product.
Selling at the wrong price
Low contribution per unit What we can find out from a balance sheet:
Poor management of costs. The value of a business (equity)
Improving profit – since profit is the difference between total revenue and The current assets a business holds
total costs, there are two general ways that a firm can improve its profit. Short-term liabilities the business will need to pay within the year
These are increased revenue or/and decreased costs. The liquidity of a business
WAYS TO INCREASE REVENUE WAYS TO REDUCE COSTS The long-term debts of a business
Increase prices. Reduce production costs
How a business has been financed.
Reduce process (dependent on price Improve efficiency
elasticity of demand)
Create awareness and desire Use capacity more fully
through marketing.
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