Financial Terms

Question 1

What is meant by the term “revenue”?

Answer 1

Revenue is the income that a firm receives from selling its goods or services.

A bakers revenue comes from selling bread and cakes to customers - a cinema’s revenue comes from selling tickets to people wanting to see

Question 2

What is meant by the term “costs”?

Answer 2

Costs are the spending necessary to set up and run a business.

There are two types of cost: fixed costs and variable costs.

Question 3

What are fixed costs?

Answer 3

Fixed costs are just that - they are fixed!

In other words they don’t alter when a business increases or decreases its output.

Examples of fixed costs are rent, insurance, accountants fees.

Question 4

What are “variable costs”?

Answer 4

Variable costs vary directly with the business’s level of output and sales.

More sales for a shop means more cost is spent on stock and possibly more staff.

Question 5

Draw the graph that shows the relationship between variable costs and fixed costs.

Answer 5

Vertical axis should be costs and horizontal axis should be amount produced by business.

The fixed costs will be a horizontal line and the variable costs will be a diagonal line.

Question 6

What is meant by start-up costs?

Answer 6

Whenever a business is launched its owners will have to pay some one off costs.

One off costs could be the purchase of a building or machinery and equipment or even initial market research. Shops need electronic tills, computers, cctv. Factories need production line equipment and computers.

Question 7

What is meant by running costs?

Answer 7

These are expenses that a business has to pay regularly as a normal part of trading such as rent, raw materials, wages and business taxes (such as value added tax, income tax, business rates and corporation tax).

Question 8

What is meant by profit!?

Answer 8

Profit is the amount by which a business’ revenue from all its sales exceeds its costs.

A loss is the amount by which a business’ costs are larger than its revenue from all of its sales.

Profits (or losses) = revenue - total costs

Question 9

How do you calculate a business’ revenue?

Answer 9

Revenue = selling price x number of products sold

If a restaurant sells its meals for an average of £20 and attracts 150 customers each week, then it’s revenue is £20 X 150 = £3,000

Question 10

Define “Price”?

Answer 10

Price is the amount a business asks a customer to pay for a single product.

Question 11

Define “Revenue”

Answer 11

Revenue is the income that a firm receives from selling its goods or services

Question 12

Define “Sales”

Answer 12

Sales refers to the number of products sold by a business

Question 13

Define “costs”

Answer 13

Costs are the spending that is necessary to set up and run a business

Question 14

Define “profit”

Answer 14

Profit is the amount by which a business’ revenue from all its sales exceed its costs

Question 15

Define “loss”

Answer 15

Loss is the amount by which a business’s costs are larger than its revenue from all sales

Question 16

How do you calculate total costs?

Answer 16

Total costs= fixed costs + variable costs

Question 17

What is meant by the term “sales”?

Answer 17

This is the number of products sold by a business over a certain time period which is normally a week, month or year.

Question 18

How do you calculate profit?

Answer 18

Profits = revenue - total costs

“Sales” (number of products sold) x “price”

Gives “revenue” - “total costs” (fixed and variable)

Gives profits or losses

Question 19

What is cash flow?

Answer 19

Cash flow is the money that flows into and out of a business on a day to day basis.

Question 20

Give three different sources of cash inflow

Answer 20

1. Income from sales
2. Loans from banks
3. Money invested by the business’s owners

Question 21

Name 6 cash outflows

Answer 21

1. Costs to start up the business
2. Buying raw materials
3. Wages
4. Rent
5. Interest on loans
6. Taxes

Question 22

What is a cash flow forecast?

Answer 22

A plan of the expected inflows and outflows to and from a business over a period of time.

Question 23

What is a cash flow statement

Answer 23

A cash flow statement is a historical record of the cash inflows and outflows that have taken place over a period of time

Question 24

Cash flow forecasts and statements are organised into 3 sections.

Name these 3 sections.

Answer 24

Cash inflows are normally at the top. When added together they represent the total cash inflow.

Cash outflows are next and when added together they represent total cash outflow.

The third section is the net cash flow where outflow is deducted from inflow.

See diagram on page 71 of textbook.

Question 25

What is “insolvency”?

Answer 25

Insolvency occurs when a business is not able to meet its financial commitments when they are due

Question 26

What is meant by a “receiver”?

Answer 26

A receiver is a person who takes responsibility for an insolvent business and makes arrangements to pay its debts

Question 27

What are the two main ways that a cash flow forecast helps entrepreneurs?

Answer 27

1. They can identify times when business might be short of cash
2. They can take action to avoid cash shortages becoming a major problem

Question 28

What happens to a business that does not have enough cash to pay its bills?

Answer 28

When a business becomes insolvent, a person called a “receiver” is appointed to administer the business (this is called a receivership).

The receiver will try to sell the business as a going concern but if there is no interest from buyers then the assets and stock are sold by the receiver to raise money for the creditors.

Question 29

Please provide 3 to 6 solutions to cash flow problems.

Answer 29

1. DELAY PAYMENTS - it may be possible for a business to agree with its suppliers or creditors to delay payments.
2. SPEED UP CASH INFLOWS - persuade customers or new customers to pay on delivery. Chase debtors or offer a discount if payment is made early.
3. FIND NEW SOURCES OF INCOME - look at new ways of making money
4. REDUCE CASH OUTFLOWS - reduce staff, hold less stock or raw materials or look at other ways to reduce variable costs
5. ARRANGE AN OVERDRAFT WITH THE BANK - short term loan
6. OWNERS COULD INVEST MORE MONEY INTO THE BUSINESS