2.3 - Managing Finance

Question 1

How do you calculate Gross Profit?

Answer 1

Sales Revenue - Cost of Sales = Gross Profit

Question 2

How do you calculate Operating Profit?

Answer 2

Gross Profit - Expenses = Operating Profit

Question 3

How do you calculate Net Profit?

Answer 3

Operating Profit - Interest payable on Loans

Question 4

How do you calculate the Gross Profit Margin (%)?

Answer 4

(Gross Profit ÷ Sales Revenue) x 100

Question 5

How do you calculate the Operating Profit Margin (%)?

Answer 5

(Operating Profit ÷ Sales Revenue) x 100

Question 6

How do you calculate the Net Profit Margin (%)?

Answer 6

(Net Profit ÷ Sales Revenue) x 100

Question 7

How can a business improve Profitability?

Answer 7

Reduce costs, increase turnover, increasing productivity, and increasing efficiency.

Question 8

What is the difference between profit and cash?

Answer 8

Profit is a major indicator of overall business success, whereas cash is needed to keep and operate the business on a daily basis successfully. It is important to mention that, over the long term, a lack of profit exerts a negative impact on the cash flow of the company.

Question 9

What is a Statement of Financial Position (Balance Sheet)?

Answer 9

It is used to report the assets, liabilities, and equity of a business on a given date – a summary, or snapshot, of its overall value at a certain point in time.

Question 10

What is Liquidity?

Answer 10

The efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.

Question 11

How do you calculate Current Ratio?

Answer 11

Current Assets ÷ Current Liabilities

Question 12

How do you calculate Acid Test Ratio?

Answer 12

(Current Assets - Stock) ÷ Current Liabilities

Question 13

How can a business improve its liquidity?

Answer 13

A business could reduce the amount of stock
that it holds, so finished goods need to be
dispatched faster to customers

A business could reduce the credit period
offered to customers, for example insist that
customers pay in 30 days not 90

A business could also pay suppliers later on
agreed credit terms

Increase borrowing long term and clear the
short term debts

Question 14

What is Working Capital?

Answer 14

The funds that a business has to meet its day-to-day expenses.

Question 15

How is Working Capital calculated?

Answer 15

Current Assets - Current Liabilities

Question 16

Why is Cash important?

Answer 16

The management of cash is very important as cash allows a business to pay its bills.

Question 17

What is Poor Working Capital Management as a factor for business failure?

Answer 17

(Internal Factor)
Inability to manage cashflow is the most common reason businesses fail.
Many profitable and seemingly successful businesses have gone ‘belly-up’ because they haven’t had enough cash to pay their bills on demand.

Question 18

What are the financial factors for business failure?

Answer 18

Poor cash flow management.
Lack of funds to pay tax bill.
Lack of capital which leads to
excessive borrowing.
Borrowing from expensive sources
e.g. credit card or overdraft (small
business).

Question 19

What are the non-financial factors for business failure?

Answer 19

Failure to innovate.
Poor marketing.
Strong Pound.
Competition.
Civil unrest.
Government Policies.
Natural Disasters.