2.3 Managing Finance

Question 1

ways to improve profitability:

Answer 1

• reducing costs
• increasing turnover
• increasing productivity
• reduce product range
• outsource non-essential functions

Question 2

difference between cash and profit

Answer 2

cash shows how much money moves in and out of your business, while profit illustrates how much money is left after the expense have been paid

Question 3

improving profitability
reduce product range

Answer 3

• business often have too many products = complex operations & inefficiency
• products may be low margin or even loss-making

Question 4

improving profitability
outsource non-essential functions

Answer 4

• way of reducing fixed costs
• focus on business on what it is good at
• areas to outsource, IT, finance

Question 5

profit definition

Answer 5

the reward or return for taking risks and making investments

Question 6

what is profit in absolute terms

Answer 6

the £ value of profits earned

Question 7

what is profit in relative terms

Answer 7

profit earned as a proportion of sales achieved or investment made

Question 8

gross profit equation

Answer 8

revenues - cost of sales

Question 9

operating profit equation

Answer 9

gross profit - expense & overheads

Question 10

gross profit margin equation

Answer 10

gross profit / sales revenue x 100

Question 11

operating profit margin equation

Answer 11

operating profit / sales revenue x 100

Question 12

net profit equation

Answer 12

operating profit - finance expenses - tax

Question 13

net profit margin equation

Answer 13

net profit/ sales revenue x 100

Question 14

what is the statment of financial positon also known as

Answer 14

balanced sheet

Question 15

what is a balance sheet

Answer 15

shows the financial position of a firm on a given day. what it owns (assets) and what it owes (liabilities). its a snapshot of the business and is used by investors to see if its worth investing in

Question 16

what are non-current assets

Answer 16

create revenue and allows them to make profits. they are kept by the business for more than a year
e.g. vehicles, machinery

Question 17

what are current assets

Answer 17

firms will keep them for a short time (less than a year) they area able to be turned to cash within a year
e.g. inventories (stocks), receivables (debtors)

Question 18

what are liabilities

Answer 18

money business owes e.g. debt

Question 19

what are current liabilities

Answer 19

debt the business will pay within a year
e.g. overdrafts, payable, tax

Question 20

what are non-current liabilities

Answer 20

debts that the business has more than one year to repay
e.g. bank loans, mortgages

Question 21

what is a liquidity ratio

Answer 21

asses whether a business has sufficient cash or cash equivalent current assets to be able to pay it debts as they fall due

Question 22

current ratio equation

Answer 22

current assets / current liabilities

Question 23

how to interpretate current ratios

Answer 23

• 1.5-2.0 suggest efficient management of working capital
• low ratio (<1) indicates cash problems
• high ratio: too much working capital

Question 24

acid test ratio equation

Answer 24

current assets - stocks / current liabilities

Question 25

interpretating acid test ratio

Answer 25

• <1 is bad news
• less relevant for business with high stock turnover

Question 26

What are inventories?

Answer 26

a list of all the stock that is held by a business, it will either be used in production or sold

Question 27

What are receivables?

Answer 27

Debt, owed to a firm by its customers for goods/services used or delivered, but not yet paid for

Question 28

What are cash and cash equivalents?

Answer 28

Items on the balance sheet that reports the value of a company’s assets that are cash or can be converted into cash immediately

Question 29

What are total current assets?

Answer 29

The resources that a business owns and expects to use or sell within a year

Question 30

What are net current liabilities

Answer 30

Current assets minus current liabilities of an organisation

Question 31

What are reserves/retained earnings?

Answer 31

Portion of a company’s net income that is kept by the company rather than being distributed as dividends

Question 32

What is total equity?

Answer 32

Difference between a companies assets and its liabilities

Question 33

What are the distribution and administration expenses?

Answer 33

Expenses that are necessary for normal business operations were not related to the cost of goods or sales

Question 34

what is an income statement?

Answer 34

measure business performance over a given period of time, usually one year. It compares the income of the business against the cost of goods or services and expenses incurred in earning that revenue

Question 35

what is a cash flow statement

Answer 35

this shows how the business has generated and disposed of cash and liquid funds during the period under review