2.3 Managing Finance

Question 1

Define ‘profit’

Answer 1

Profit is the money left over after all costs have been accounted for

Question 2

What are the 3 different types of profit?

Answer 2

Gross Profit
Operating Profit
Net Profit

Question 3

What is gross profit?

Answer 3

The difference between revenue and the costs directly related to production

Question 4

What is operating profit?

Answer 4

The difference between the gross profit and the indirect expenses involved in operating the business

Question 5

What is net profit?

Answer 5

The difference between the operating profit and any interest paid and recieved, as well as many one off costs

Question 6

What is the formula for gross profit?

Answer 6

Revenue - Costs of sales

Question 7

What is the formula for operating profit?

Answer 7

Gross Profit - Operating Expenses

Question 8

What is the formula for net profit?

Answer 8

Operating Profit - (net interest + exeptional costs)

Question 9

What’s the formula for profit of the year after tax?

Answer 9

Profit for the year - Tax

Question 10

What is a profit margin?

Answer 10

The amount by which the sales revenue exceeds the costs

Question 11

How do you work out the gross profit margin?

Answer 11

Gross profit/Revenue X100

Question 12

How do you calculate the operating profit margin?

Answer 12

Operating Profit/Revenue X100

Question 13

How do you calculate the net profit margin?

Answer 13

Profit for the year/Revenue X100

Question 14

What ways are there to improve profitability?

Answer 14

• Increase Prices
• Reduce variable costs
• Reduce expenses
• Reduce one-off costs and interests

Question 15

Define liquidity in a business?

Answer 15

The ability of a business to meet its short term commitments (e.g. payments to its creditors ) with its avaliable assests

Managing liquidity is a key way to manage risk in a business - and helps a business to prepare for the unexpected

Question 16

What is a balance sheet?

(Statement of financial position)

Answer 16

Contains the financial information required to draw conclusions about the liquidity of the business

Question 17

What is in the statement of financial position?

Answer 17

Shows the financial structure of a business at a specific point in time

It identifies a businesses assets and liabilities and specifies the capital (money) used to fund the business

Question 18

What is the formula for current ratio?

Answer 18

Current Assests/Current Liabilities

?:1

Question 19

What is the formula for the acid test?

Answer 19

Current Assets - Inventory / Current Liabilitys
?:1

Question 20

What ways are there to improve liquidity?

Answer 20

Reduce the credit period offered to customers - Collecting money owed from customers more quickly will increase the level of current assets in the business

Ask suppliers for an extended repayment period e.g an extension from 60 to 90 days

Sell off excess stock- Less liquid current assets will be reduced and converted into more liquid forms of current asset (e.g. cash)
Storage and security costs may also be reduced

Question 21

Define ‘Working Capital’.

Answer 21

• Working capital is the money that a business has to fund its day to day activities
• It is often described as net current assets on the Statement of Financial Position

Question 22

What is the formula for working capital?

Answer 22

Current Assets- Current Liabilities

Question 23

What are some internal causes of business failure?

Answer 23

Poor planning-Ineffective business plan,poor budgeting, lack of research & development

Lack of leadership-Poor decision making,Lack of urgency

Ineffective marketing-Not enough/inapropriate market research

Lack of funds-Failure to attract investment

Question 24

What are some external causes of business failure?

Answer 24

Economic challanges- Business failure tends to increase in periods of recession due to reduced demand, rising interest rates

Changes in consumer tastes- The need for frequent market research increases costs

Legal factors Market challanges- Products or assets may need to be redesigned or replaced to meet changed legal standard