2.3

Question 1

Formula for:
Gross profit
Gross profit margin
Operating profit
Operating profit margin
Net profit
Net profit margin

Answer 1

Gross profit= Revenue–Cost of sales

Gross profit margin= Gross Profit/Revenue x100

Operating profit=Gross Profit–Operating expenses

Operating profit margin=Operating profit/Revenue x100

Net profit = Operating profit- taxes,interest,ect

Net profit margin= Net profit/Revenue x100

Question 2

Define statement of comprehensive income
What can it be used to do

Answer 2

communicates he revenue generated by a business and its profits at various levels following a series of expenses and exceptional incomes
> Profit and loss account

Can be used to:
- Calculate profit margins, gross profit,operating and net profit

Question 3

Ways to improve profitability

Answer 3

• Increase revenue
  > Increase price
  > Advertising to increase demand
  > Add value to product (USP)
• Reduce costs
  > Reduce production costs
  > Improve efficiency
  > Use capacity fully
  > Reduce variable cost with suppliers
  > Lower overheads- move to cheaper location

Question 4

Difference between profit and cash

Answer 4

Profit is the revenue remaining after deducting all costs whilst cash flow is the amount of money flowing in and out of the business

• The main difference is time, a firm cannot be very profitable if its not good at managing its cash flow
• A business can be profitable but still run out of cash if too much is tied up in stock or unpaid invoices.

Question 5

Define Statement of financial position

Answer 5

financial document that records the assets and liabilities of a business- giving the value and strength of a business

Question 6

Current ratio and acid test ratio formulas

Answer 6

Current Ratio = Current Assets ÷ Current Liabilities
> Shows it has sufficient capital to cover SR debts

Acid Test = (Current Assets – Inventory) ÷ Current Liabilities
> Removes stock as there is no guarantee that it can be turned into cash quickly

Question 7

Define liquidity and ways to improve liquidity

Answer 7

Liquidity refers tot he ability of a business to pay its debts and liabilities in cash when they fall due

Ways to Improve Liquidity
- Cut costs and overheads
- Delay payments to suppliers (within reason)
- Encourage early settlement of payments
- Sell off excess stock
- Negotiate SR loans
- Trade credit
- Encourage cash sales

Question 8

What is working capital and give formula

Answer 8

Working capital is the money within a business that is needed to pay for the day to day running costs eg bills

Working Capital = Current Assets – Current Liabilities

Too little = risk of running out of cash
Too much = missed opportunities (e.g. money tied up in inventory)

Question 9

Importance of Cash

Answer 9

-Pays wages, suppliers, bills, and rent
-Keeps business running daily
-Prevents insolvency (running out of money)

Question 10

Internal Causes of Business Failure

Answer 10

• Poor cash flow management – e.g. spending too much, not chasing debts
• Poor planning- can lead to important factors not being addressed
• Poor marketing-not understanding needs
• Lack of skills set

Question 11

External causes of business failure

Answer 11

• Competition= can lead to fall in demand and sales
• Legislation= increased costs as business may need to adjust
• Marketing conditions eg commodity prices/consumer tastes
• PESTLE

Question 12

Causes of cash-flow problems

Answer 12

• Allowing too much credit to customers
• Overtrading
• Poor credit control- not chasing debts and ensuring payments on time
• Inaccurate cash flow management
• Unforeseen costs- not accounted for in cash flow