2.3 - Managing Finance

Question 1

What is the formula for gross profit?

Answer 1

Gross profit = sales revenue - cost of goods sold

Question 2

What is the formula for operating profit?

Answer 2

Gross profit - operating expenses

Question 3

What is the formula for profit for the year (net profit)

Answer 3

Profit for the year (net profit ) = Operating profit - interest

Question 4

What is the formula for gross profit margin?

Answer 4

Gross profit / sales revenue (x100)

Question 5

What is the formula for operating profit margin?

Answer 5

Operating profit / revenue (x100)

Question 6

What is the formula for net profit margin?

Answer 6

Net profit (before tax) / revenue (x100)

Question 7

What is a statement of comprehensive income (profit and loss account)?

Answer 7

A statement showing the income and expenses of a business during the financial year. It is used to calculate gross profit, operating profit and profit for the year (net profit)

Question 8

What are someways a business can improve its profitability?

Answer 8

• raising prices - more revenue for every unit sold, if costs remain the same then profitability should improve
• lowering costs - can be done by buying cheaper resources or using existing resources more efficeintly

Question 9

What is a statement of financial position?

Answer 9

A document that provides a summary of its assets, liabilities and capital.

Question 10

What is an assest?

Answer 10

• The resources owned by a business. E.g. machinery, equipments, vehicles, stock and cash.

Question 11

What are liabilities?

Answer 11

The debts of the business, in other words what it owes to others. They can be short term e.g. overdrafts or long term e.g. mortgage

Question 12

What is capital?

Answer 12

The money put into the business by the owners, along with other sources of finance it is used to buy assets.

Question 13

What are non-current assets?

Answer 13

Long-term resources that will be used repeatedly by the business over a period of time. E.g. land, property, equipment. Can also be intangible e.g. brand names

Question 14

What are current assets?

Answer 14

Assets that will be changed into cash within 12 months. They are liquid assets.

Question 15

What is meant by liquidity?

Answer 15

The liquidity of an asset is how easily it can be converted into cash. E.g. inventories

Question 16

What are current liabilities?

Answer 16

Any money owed by a business that must be repaid within one year. E.g. short term loans for example overdrafts

Question 17

What are non-current liabilities?

Answer 17

Long term loans and any other money owed by the business that does not have to be repaid for at least one year. E.g. long term loans, mortgages.

Question 18

What is the formula for current ratio?

Answer 18

Current ratio = current assets / current liabilities

Question 19

What is the formula for acid test ratio?

Answer 19

Acid test ratio = current assets - inventories / current liabilities

Question 20

What is working capital? Why does a business need working capital?

Answer 20

The amount of money needed to pay for the day-to-day trading of a business. A business needs working capital to pay expenses such as wages, electricity and gas charges.

Question 21

What is the formula for working capital?

Answer 21

Working capital = current assets - current liabilities

Question 22

What are some ways to improve liquidity?

Answer 22

• use overdraft facilities
• negotiate additional short-term or long-term loans
• encourage cash sales and sell off stocks
• only make essential purchases

Question 23

What are some internal causes of business failure?

Answer 23

• lack of planning - new businesses may overlook the importance of planning, including financial planning, therefore a thorough business plan is needed to provide clarity
• cash flow problems e.g. external factors, seasonal factors, poor financial management, over trading
• lack of funds
• narrow customer base

Question 24

What are some external causes of business failure?

Answer 24

• competition
• changes in legislation e.g. new laws
• changes in consumer tastes
• economic conditions e.g. recessions, interest rates, exchange rates

Question 25

What are financial causes of business failure?

Answer 25

• businesses may become bankrupt (taken to court by creditors) or insolvent (where they cease trading of their own accord)
• the most common reason for this failure is shortage of cash, meaning the business would not be able to pay immediate debts

Question 26

What are non-financial causes of business failure?

Answer 26

• lack of planning
• lack of business skills
• inability to compete effectively
• failure to meet customer needs