Finances

Question 1

Gross profit -

Answer 1

Is the amount of money the business makes after the direct costs of making/selling its products or providing its services, otherwise known as its costs of sales, are deducted from its sales revenue

Question 2

Net profit -

Answer 2

Is the profit the business generates after all other operating expenses and interest, not included the calculation of gross profit, have been paid

Question 3

Gross profit formulae

Answer 3

= sales revenue - cost of sales

Question 4

Net profit formulae

Answer 4

= gross profit - other operating expenses and interest

Question 5

Cost of sales/cost of goods sold -

Answer 5

The actual value of inventory used to generate sales

Question 6

Cost of sales formulae

Answer 6

= opening inventories + purchases - closing inventories

Question 7

Examples of business expenses (3)

Answer 7

1. Salaries
2. Rent
3. Electricity

Question 8

Ratio analysis:

Answer 8

Reviewing the gross and net profit figures will tell business owners/managers how much profit a business has made in a specific time period. One way to judge how “profitable” a business is to calculate profitability ratios.

Question 9

Gross profit margin

Answer 9

This is the percentage of sales revenue that is gross profit. This means what % of your sales revenue are you turning into Gross Profit. The higher the % the better for the business.

= gross profit/sales revenue x 100

Question 10

How to improve gross profit margin (2)

Answer 10

1. Increase sales revenue
2. Lower cost of sales

Question 11

Increase the business sales revenue (GPM) (3)

Answer 11

1. Lowering the selling price may increase demand
2. Increasing the price may generate more revenue
3. Increase awareness of the product

Question 12

Lower the costs of sales (GPM) (3)

Answer 12

1. Cut down on the price paid to suppliers through renegotiating with existing suppliers
2. Change suppliers, if another supplier can offer cheaper prices
3. Review their existing products and see if they could be made more cheaply to cut costs

Question 13

Net profit ratio

Answer 13

This shows what % of your sales revenue are you turning into Net profit. The higher the % the better, however remember that this will be lower than your gross profit margin.

= net profit/sales revenue x 100

Question 14

Improving the net profit margin (2)

Answer 14

1. Increase sale revenue
2. Lower expenses

Question 15

Increasing sale revenue (NPM) (3)

Answer 15

1. Lower the selling price
2. Increase the selling price
3. Increase awareness of the product through promotion, but the expense of this needs to be carefully monitored in terms of the impact on revenue and net profit

Question 16

Lower expenses (NPM) (4)

Answer 16

1. Delayer the organisational structure
2. Review salary structure or bonuses
3. Freeze recruitment
4. Move to a cheaper location

Question 17

Which ratio is better?

Answer 17

The net profit margin (%) is a better indication of a business’s financial performance, as the ratio takes into account all the other operating expenses/interest of the business. In contrast, the GPM (%), only takes into account the cost of sales.

Question 18

How to access financial performance (4)

Answer 18

1. Targets
2. Previous years figures
3. Competitors performance
4. Stakeholder objectives

Question 19

Performance ratios (2)

Answer 19

1. Gross profit margin
2. Net profit margin

Question 20

Business investment -

Answer 20

• when money is used to purchase an asset that is expected to generate a return of income or profit

Question 21

Types of business investment (3)

Answer 21

1. Land and buildings (usually required when the first starts up or when it expands)
2. Machinery (needs capital to produce)
3. Vehicles (cost effective, modern and reliable transport network can reduce costs and improve profitability)

Question 22

Average rate of return (ARR) formula

Answer 22

Average annual profit/cost of investment x 100

Question 23

ARR compares the…

Answer 23

…projected average annual profit of an investment in its expected life with the cost of the investment; expressed as a %.

Question 24

Average annual profit =

Answer 24

= total profit/number of years

Question 25

Difference between marketing data and market data

Answer 25

Marketing data - includes businesses’s internal data, such as data on sales figures, marketing spend and and market research
Market data - generally available through secondary data for the industry, looks on a market as a whole (demographics)

Question 26

Market share -
How to calculate =

Answer 26

• the percentage of market that the business owns of market
  = business or product sales / total sales in the market x 100

Question 27

The limitations of financial information (3)

Answer 27

1. Raw data might be biased or inaccurate
2. Data is only quantitative, qualitative data can be more insightful
3. Data doesn’t help if businesses don’t take the time to analyse it