2.4 - Making financial desicions

Question 1

How can a business measure its profitability?

Answer 1

Gross and net profit margins, as they show the proportion of each sales that contributes to profit.

Question 2

How can a business improve its profitability?

Answer 2

1. Lower direct costs, this will improve both gross and net profit levels
2. Lower indirect costs, this will improve the net profit levels
3. Increase sales revenue by either selling more or raising the sale price. This will impact both gross and net profit levels.

Question 3

What is quantitative data and how might a business use this type of data?

Answer 3

• Quantitative data is data about numbers
• Quantitative data is displayed in charts, graphs, as statistics and percentages
• It is used to make informed business decsions

Question 4

Explain the term ‘ market data’. Use examples to support your definition.

Answer 4

Market data: This is data about the all the customers and competitors in that particular market. This data will also influence marketing mix decisions.

Examples include:

• the size of the market in terms value (£) or quantity of items sold
• demographics such as population and household income, migration or unemployment rates for example
• number of competitors and the growth rate of the market.

Question 5

Explain the term ‘ financial data’. Use examples to support your definition.

Answer 5

Financial data is information used to inform decisions about revenues, costs and spending patterns. Examples include:

• interest rates
• taxation levels
• gross and net profit figures/margins
• sales volumes
• revenues
• directs and indirect cost
• average rates of return.

Question 6

Explain the term ‘ marketing data’. Use examples to support your definition.

Answer 6

Marketing data is obtained from primary or secondary research about a business’ own products and services and its own marketing activity. This data is mostly used to make decisions about the 4P’s.

Examples include:

• customer satisfaction
• customer visits
• customer opinions about the businesses own product/service/marketing strategies.

Question 7

What are the limitations of financial data?

Answer 7

• May only show a snapshot of a short period of time
• It is historic: can quickly become out of date, as such a business may be making a decision based on past performance alone.
• The reasons behind the numbers are also important, for example if gross profit has fallen it may be bacuse of a downturn in the economy rather than a factor a business can control and as such it is important to understand why so a business can then develop a strategy.
• Statistics can be manipulated, they can be expressed in different ways to give them a different emphasis
• Business performance is not solely judged on financial performance as there are many other qualitative factors that may also be important, such as social objectives, business reputation or employee motivation. These will be influenced by the organiations aims and objectives- which may go beyond financial performance.