2.3 Managing Finance

Question 1

What is gross profit?

Answer 1

The difference between revenue and the costs of sales, it shows the profit made on the trading activity before any other costs are taken into account

Question 2

What is operating profit?

Answer 2

Takes into account the other operating expenses on top of gross profit

Question 3

What is net profit?

Answer 3

the actual profit the business has made taking into account interest

Question 4

How do you calculate gross profit?

Answer 4

revenue - cost of sales

Question 5

How do you calculate operating profit?

Answer 5

gross profit - other operating expenses

Question 6

How do you calculate net profit?

Answer 6

operating profit +/- interest

Question 7

What are profit margins?

Answer 7

The ratio expressed as a percentage. It compares the profit figure to sales revenue (the proportion of sales revenue that has been converted into profit)

Question 8

What is a gross profit margin and how is it calculated?

Answer 8

An indicator for analysing how a business has performed in terms of its direct trading activity. It helps a business understand if their products have been successful however, it doesn’t take into account indirect costs
Calculation:
gross profit/revenue x 100

Question 9

What is an operating profit margin and how is it calculated?

Answer 9

Takes into account the performance of a business more fully, as it takes into account direct and indirect costs. It’s a useful tool when used alongside gross profit margin
Calculation:
operating profit/revenue x 100

Question 10

What is a net profit margin and how is it calculated?

Answer 10

Takes into account all revenues and costs incurred by the business. |t’s a good measure of how effectively the business performed dover the financial year. It may be used to identify the potential to pay a dividend to shareholders
Calculation:
net profit/revenue x 100

Question 11

What is the statement of comprehensive income?

Answer 11

Its a financial document that communicates revenue generated by a business and then its profit at various levels following a series of expenses and exceptional incomes

Question 12

What are 5 things you can find out from the statement of comprehensive income?

Answer 12

1) changes in sales revenue
2) changes in the direct costs of sales
3) how well a business is managing its operating costs
4) the profitability of a business
5) unusual incomes/expenses during the year

Question 13

What are 4 ways to increase revenue?

Answer 13

1) increase prices
2) reduce process (depends on PED)
3) create awareness and desire through marketing
4) Add value to the product- increases benefits and features

Question 14

Explain what is meant by improving profit?

Answer 14

Profit is the difference between total revenue and total costs. You can increase revenue and/or decrease costs

Question 15

What are 5 reasons why businesses are unprofitable?

Answer 15

1) no demand for the product
2) selling at the wrong price
3) low contribution per unit
4) poor management of costs
5) expansion of the business- profit retained and not available for return to shareholders

Question 16

What are 6 ways to reduce costs?

Answer 16

1) reduce production costs
2) improve efficiency
3) use capacity more fully
4) eliminate unprofitable processes eg.unprofitable product lines
5) reduce variable costs- negotiate better deals with suppliers
6) lower overheads- move to cheaper location

Question 17

What is the difference between cash and profit?

Answer 17

Profit is an absolute position when all costs have been deducted from revenue whereas cash flow is an ongoing concern. in order to reach a position of profit a business must manage cash flow so it can pay expenses and running costs. However, timing is crucial to this as expenses are often incurred before revenue is generated/received

Question 18

What is the statement of financial position and what is it also known as?

Answer 18

A financial document that records the assets and liabilities of a business, it gives a snapshot of the value and financial strength of a business
aka. balance sheet

Question 19

What are 6 things you can find out from the statement of financial position?

Answer 19

1) the value of a business (equity)
2) the current assets a business holds
3) short term liabilities the business will need to pay within the year
4) the liquidity of a business
5) the long term debts of a business
6) how a business has been financed

Question 20

What is meant by liquidity?

Answer 20

A business’ ability to pay its debts and liabilities in cash when they fall due. Cash is the most liquid asset that a business has and any business would quickly fail if it ran out of cash

Question 21

What is meant by current ratio?

Answer 21

It’s a liquidity ratio. It compares current assets with current liabilities and in doing so it assesses whether a business has sufficient working capital to pay its short term debts

Question 22

How do you calculate the current ratio?

Answer 22

current assets/current liabilities

Question 23

What is meant by acid test ratio?

Answer 23

A more severe measure of liquidity, it doesn’t take into account the inventories of a business as for many businesses there is no guarantee that inventories can be quickly turned into cash

Question 24

How do you calculate the acid test ratio?

Answer 24

(current assets-inventories)/current liabilities

Question 25

What is working capital?

Answer 25

Money within a business that is needed to pay for the day to day running costs eg. wages, bills, purchasing stock

Question 26

How do you calculate working capital?

Answer 26

current assets - current liabilities

Question 27

What are 7 ways to improve liquidity?

Answer 27

1) negotiate additional short term loans
2) encourage cash sales
3) encourage early settlement of debts
4) sell off current assets (stock)
5) delay payments
6) use an overdraft facility
7) take out credit agreements with suppliers

Question 28

What are 4 external factors of business failure?

Answer 28

1) competition- new competitor/crowded market can lead to a shortage of demand
2) legislation- increased costs as a business adjusts its products and processes to comply
3) economic conditions
4) market conditions- changes in commodity prices or consumer tastes

Question 29

What are 4 internal factors of business failure?

Answer 29

1) poor planning
2) cash flow
3) marketing
4) lack of skills

Question 30

What are 5 causes of cash flow problems?

Answer 30

1) overtrading
2) allowing too much trade credit to customers
3) poor credit control- not chasing debts and ensuring customers pay on time
4) inaccurate cash flow management- poor research or lack of any cash flow management