2.3 Managing finance

Question 1

what are the 3 types of profit

Answer 1

gross profit
operating profit
net profit

Question 2

what can profit figures tell you about a business

Answer 2

gp = the higher the better - can be compared annually or between departments

np = higher is better and demonstrates how well a business is controlling their expenses

Question 3

calculate gross profit

Answer 3

sales revenue - cogs

Question 4

gp margin

Answer 4

gp / sales revenue x 100

Question 5

operating profit

Answer 5

gp - expenses

Question 6

operating profit margin

Answer 6

op / sales revenue x 100

Question 7

net profit

Answer 7

op - interest

Question 8

net profit margin

Answer 8

net profit / sales revenue x 100

Question 9

what is an income statement

Answer 9

= measures the businesses performance over a given time period
- financial document showing company revenue

Question 10

which stakeholders are interested in a businesses P&L

Answer 10

shareholders - final profit figure/dividends
investors - want to know the profitability
employees and managers - may wish to know the expenses of the business

Question 11

ways to improve profitability

Answer 11

risky strategy, raise prices
- although this may impact sales and demand may fall dependent on elastacity

move production to NEE, redundancies, buy cheaper raw materials, upgrade machinery

Question 12

profit vs cash

Answer 12

profit - recorded straight awat, can trade without profit, must increase revenue or reduce costs sp improve

cash = will not be recorded until it is paid out, cannot pay wages or bills without cash

Question 13

define liquidity

Answer 13

the ability of a business to turn its assets into cash to pay its current liabilities

Question 14

what is a balance sheet

Answer 14

• document showing what a business owns = its liabilities
• judge the financial position of the business

Question 15

non current assets

Answer 15

non current - long term assets which are not expected to be sold within the next year of trading

e.g. intangible assets (copyright, patents, trademarks)
tangible assets - property, equipment
deffered tax assets

Question 16

current assets

Answer 16

= likely to be turned into cash within the next year of trading
e.g. inventories, trade and other receivables, cash

Question 17

non current liabilities

Answer 17

= debts which are not expected to be paid off within the next year of trading
e.g. borrowings, retirement benefit obligations, provision for liabilities

Question 18

current liabilities

Answer 18

= debts which are expected to be paud within the next year of trading
e.g. borrowing, curremt tax liabilities and provision for liabilities

Question 19

define equity

Answer 19

= value of shares issued by a company and money owed to the shareholders

accummulated losses = losses from previous years trading, which decrease the value of the equity

Question 20

uses and limitations of a balance sheet

Answer 20

USES
- to evaluate performance and potential of a business to an investor
- summary of business
LIMITATIONS
- value of assets stated may not be same as the amount they sell for
- static snapshot

Question 21

define liquidity

Answer 21

the ability of a business to turn its assets into cash
= indicates to an investor the ability of a business to pay its debts

Question 22

how is liquidity measured

Answer 22

measured by calculating the current ratio and acid test ratio

Question 23

current ratio

Answer 23

current assets / current liabilities
= also known as the working capital ratio
= 1.5:1 - 2:1 then the business has plenty of working capital to meet daily expenses
- above 2:1 = too much money tiede up in assets
- less than 1.5:1 may be a problem unless they have fast moving stock generated from cash sales

Question 24

acid test ratio

Answer 24

current assets - stock / current liabilities
= harsher test of liquidity as you cannot guarantee to sell all stock
- less than 1:1 means they do not cover current liabilities

Question 25

what are some ways to improve liquidity

Answer 25

= could reduce amount of stocks in hold
= reduce the credit period offered to customers
= set up forms of trade credit
= increase borrowing long term and clear short term debts

Question 26

working capital

Answer 26

= funds that a business has to meet for its daily expenses
= CA - CL
= low working capital could indicate the business were having trouble with their expenses

Question 27

define administration

Answer 27

directors feel forced by the threat of insolvency to hand over management control to often an accountant who may try to sell the business or sell off assets

Question 28

what are financial reasons for failure

Answer 28

• poor cash flow management
• lack of funds to pay tax bill
• lack of capital leading to excessive borrowing
• borrowing from expensive sources

Question 29

poor working capital management leading to business failure

Answer 29

• internal
• measure of efficiency
• most common reason for failure
• lack of cash to pay bills

Question 30

how can a business control the amount of cash used

Answer 30

• minimising stock levels
• keeping customer credit as low as possible
• using credit from suppliers
• business to consumer as fast as possible

Question 31

why is cash important to a business

Answer 31

• ability to meet expenses
• able to buy supplies in bulk
• benefit from economies of scale

Question 32

define business failure

Answer 32

the inability to keep the business going, likely due to financial reasons

Question 33

what are some internal causes of business failure

Answer 33

• marketing = saturated and overly competitive markets
• poor management (especially of cash flow)
• systems failure = updated technology without training staff

Question 34

what are some external causes of business failure

Answer 34

• technological changes that provide rivals with a competitive advantage
• arrival of a competitor
• economic change
• behaviour of banks

Question 35

what are some financial causes of business failure

Answer 35

• running below break even for a long period of time
• becoming overly dependent on one supply chain
• a rise in demand could encourage a short termite approach

Question 36

non financial causes of business failure

Answer 36

• competition
• long term sales decline