2.3- Managing Finance

Question 1

What is profit and how can it be calculated?

Answer 1

Profit is the financial gain of a business through trading and can be found by subtracting total costs from total sales revenue.

Question 2

What is a statement of comprehensive income?

Answer 2

• SOCI is a document that shows a PLC’s and Ltd’s profit and losses.
• In the UK it is law for PLC’s and Ltd’s to publish all their accounts every year including SOCI.

Question 3

What are the 3 types of profit a business has?

Answer 3

• Gross
• Operating
• Net

Question 4

What is the formula to calculate ‘Gross profit’?

Answer 4

Gross profit= Sales revenue- Cost of sales

(Cost of sales are costs that vary with output or level of sales, e.g stock)

Question 5

What is the formula to calculate ‘Operating profit’?

Answer 5

Operating profit= Gross profit- Expenses

( Expenses are other costs to the business aside from stock, e.g advertisement)

Question 6

What is the formula to calculate ‘Net profit’?

Answer 6

Net profit= Operating profit- interest

(Interest are payments due on loans or debts)

Question 7

What is the formula to calculate ‘Gross Profit Margin’?

Answer 7

GP Margin= Gross profit/ Sales revenue X100

(Answer as a %)

Question 8

What is the formula to calculate ‘Operating profit margin’?

Answer 8

OP margin= Operating profit/ Sales revenue X100

(Answer as a %)

Question 9

What is the formula to calculate ‘Net profit margin’?

Answer 9

NP margin= Net profit/ Sales revenue X100

(Answer as a %)

Question 10

What are ways that a business can increase sales revenue?

Answer 10

• Have a sale
• Reduce prices of products
• Increase advertisement

Question 11

How can you differentiate Cash and Profit within a business?

Answer 11

1. The profit of a business is recorded straight away, however cash will not be recorded until it is paid out or received which could be in a different trading year.
2. A business can survive and trade for many years without profit, however a business can be profitable but if it runs out of cash to pay immediate costs it may go bust.

Question 12

What is liquidity?

Answer 12

• The ability of a business to turn its assets into cash, to pay its current liabilities.
• The least liquid assets are listed at the top of he statement of financial position (e.g premises and specialist machinery, as it may take a while to sell)
• Stock would be near the bottom of the list as it is easy to sell on.
• Cash is the most liquid asset of all.

Question 13

What is a statement of financial position and what does it show?

Answer 13

• PLC and LTD businesses have to publish their accounts every year by UK law.
• One of these accounts are called the statement of financial position.
• Shows: Non current assets, Current assets, Current liabilities, Non current liabilities and Equity/shareholder funds.

Question 14

What are the two ways that a business can measure liquidity (ability to pay bills)?

Answer 14

• Current ratio
• Acid test ratio

Question 15

What is the formula to calculate ‘Current ratio’?

Answer 15

Current assets/ Current liabilities

Question 16

What is the formula to calculate ‘Acid test ratio’?

Answer 16

Current assets- Inventory/ Current liabilities

Question 17

What does the Acid test conclude about a business?

Answer 17

• It is a harsher test of liquidity to current ratio as it doesn’t include stock as an asset as you can’t guarantee stock to be sold.
• If a business has an acid test ratio of less than 1:1 then it’s current assets do not cover it’s current liabilities and it will be a problem.
• However, some retailers with strong cash flow and fast moving stocks may have an acid test ratio of 0.4:1 and be fine, it depends on the industry.

Question 18

What are ways that the liquidity of a business could be improved?

Answer 18

1. Reduce amount of stock that it holds, so finished goods need to be dispatched faster to customers.
2. Can reduce the credit period offered to customers, e.g pay within 30 days instead of 90.
3. A business could agree to pay suppliers later on agreed credit terms.

Question 19

What is the Working Capital of a business?

Answer 19

Working capital means the day-to-day finance needed in a business and can be calculated by CA- CL. (Current assets- current liabilities).

Question 20

What are the 4 stages to the Working capital cycle?

Answer 20

1. Cash
2. Cash paid by debtors for goods or services brought (current asset).
3. Sales
4. Stock purchased from suppliers on credit (current liability)

Question 21

What is business failure?

Answer 21

Business failure is when a business ceases to trade, when a business does not trade in a profitable way or when a business makes a terrible decision.

Question 22

What are the 4 internal causes of business failure?

Answer 22

1. Poor efficiency
2. Poor marketing
3. Failure to innovate
4. Bad management of working capital

Question 23

What are the 2 external causes of business failure?

Answer 23

1. Economic recession
2. Strong pound

Question 24

What is an economic recession and how can it lead to business failure?

Answer 24

• As a county enters economic recession, customers start to save rather than buy.
• People put off decisions to purchase large expensive items and they also switch to buying more inferior goods.
• These buying decisions means that some businesses fail in a recession, whereas others might prosper.

Question 25

What does it mean for the pound to be strong and how can it lead to business failure?

Answer 25

• Strong pound means that manufacturing businesses who heavily export will be affected.
• It means their goods and products that they manufacture will cost their customers more.
• Some businesses shift production overseas to counter this affect but not all can afford to do this.
• SPICED, Strong Pound Imports Cheaper Exports Dearer.