finance: topic 5

Question 1

what is total revenue

Answer 1

total revenue is the sum of money a business earns from the sales it makes
it is a measure of success

Question 2

how can you increase revenue

Answer 2

decrease price - ask if the potential increase in sales and profit outweighs the cost of advertising and price reduction

increase the price - works only if customers won’t switch to a cheaper competitor (brand loyalty)

Question 3

equation for revenue

Answer 3

total revenue = total quantity sold x price of products

Question 4

what’s the extended magic formula?

Answer 4

sales - variable costs = gross profit - fixed costs = net profit

Question 5

how do you calculate ARR?

Answer 5

1. total net profit
2. average profit per year (NP/years)
3. average profit as a proportion of the original investment (x/original investment cost x 100)

Question 6

define ARR

Answer 6

MOMACPILI

method of measuring and comparing the profitability of an investment over the lifetime of an investment

Question 7

what are the advantages of using ARR

Answer 7

• informs decisions for potential investments
• helps with planning long term
• can compare investments
• can decide if an investment is worthwhile
• simple profitability calculation

Question 8

disadvantages of using ARR

Answer 8

• there could be changes in the cost/availability of raw materials
• based on quality of primary+secondary market research
• the market could change
• its a prediction/forecast and therefore not 100% reliable

Question 9

where is the break even point on a graph?

Answer 9

where the sales revenue and total costs cross

Question 10

benefits of calculating the break even?

Answer 10

• helps to secure finance
• can set short/medium/long term goals
• shows margin of safety
• helps decide prices
• helps analyse costs + relationship between fixed and variable
• can run ‘what if’ scenarios

Question 11

what is the margin of safety?

Answer 11

the difference between the current sales and the break even point

Question 12

limitations of calculating break even?

Answer 12

• forecast so not 100% reliable
eg. competition moving closer could change it, affects sales
• suppliers could change prices
• promotional offers
• not reliable when selling millions of products (eg amazon)

Question 13

what is ‘Total Inflows’

Answer 13

the total cash that flows in each month

Question 14

what is ‘Total Outflows’

Answer 14

the total cash that flows out in the month

Question 15

how do you calculate Net Cash Flow?

Answer 15

Net Cash Flow = Total Inflow - Total Outflow

Question 16

how do you calculate Closing Balance?

Answer 16

Opening Balance +/- Net Cash Flow = Closing Balance

Question 17

how do you get the Opening Balance?

Answer 17

it’s last months Closing Balance

Question 18

what’s the difference between cash and profit?

Answer 18

profit is the money left when costs are taken away from sales revenue and can be a prediction
cash is the money has in the bank or on its premises

Question 19

consequences of a shortage of cash

Answer 19

cant pay suppliers —> cheaper supplier —> reduce quality —> reduce sales and profit

cant pay suppliers —> bad reputation—> cant get raw materials —> legal action

lack of cash —> cant pay bills —> bankruptcy —> loss of assets (depends) —> loss of business

restructure —> less staff (flat vs tall) —> less morale and motivation

don’t pay salary/wages —> legal action

Question 20

what is the result of negative cash flow?

Answer 20

the business doesn’t have liquidity and can’t pay any short term bills

Question 21

what’s the function of the finance department?

Answer 21

1. managing and planning budgets
2. managing and planning savings and growth, financial forecasts
3. collects money +/ payment, sends out bills
4. in charge of payroll, deals with tax (20% on all profit)
5. supports ALL other functions

Question 22

importance of finance+the finance department

Answer 22

finance informs decision making

the finance department helps managers at all levels to make tactical and strategic decisions

Question 23

list the sources of finance

Answer 23

LAPTOPSCC

loan, sale of assets, retained profit, trade credit, overdraft, new partner, share issue, owners capital, crowd funding