Making financial decisions

Question 1

What is profit in a business?

Answer 1

The money left over after all expenses are paid.

Question 2

What are the two types of costs businesses separate?

Answer 2

Variable costs and fixed costs.

Question 2

What are the two types of profit businesses can calculate?

Answer 2

Gross profit and net profit.

Question 2

What is gross profit?

Answer 2

The difference between sales revenue and the cost of sales, ignoring fixed costs.

Question 2

What is sales revenue?

Answer 2

The money received from selling goods and services.

Question 2

Why is gross profit useful?

Answer 2

It shows how much profit each product or service generates.

Question 2

What is the formula for calculating gross profit?

Answer 2

Gross profit = sales revenue − cost of sales.

Question 3

What is the cost of sales?

Answer 3

The variable costs directly related to production, such as raw materials.

Question 3

How does gross profit differ from net profit?

Answer 3

Gross profit ignores fixed costs, while net profit includes them.

Question 3

What does cost of sales include?

Answer 3

Variable costs directly related to making goods or providing services

Question 3

Why is net profit often considered more important than gross profit?

Answer 3

It includes all fixed costs and other overheads a business has to pay.

Question 3

What is net profit?

Answer 3

The difference between sales revenue and all costs incurred to make goods or services.

Question 3

What does a negative net profit indicate?

Answer 3

The business has made a loss because its costs are greater than its sales revenue.

Question 4

What is the formula for calculating net profit?

Answer 4

Net profit = gross profit − other operating expenses and interest.

Question 5

What does net profit take into account that gross profit does not?

Answer 5

Fixed costs, overheads, and other operating expenses.

Question 5

Why are profit calculations alone of limited use?

Answer 5

They need additional context to assess business performance, such as profit margins.

Question 5

What can comparing gross profit over time show?

Answer 5

Whether products have become more or less profitable.

Question 6

What does a business learn from the example where gross profit doubled, but sales revenue tripled?

Answer 6

The business might explore why gross profit didn’t grow at the same rate as sales revenue.

Question 7

What is profit margin?

Answer 7

Profit expressed as a percentage of sales revenue.

Question 8

What are the two types of profit margin?

Answer 8

Gross profit margin and net profit margin.

Question 9

What does gross profit margin show?

Answer 9

The percentage of sales revenue left after paying the cost of sales.

Question 10

What does a gross profit margin of 75% mean?

Answer 10

For every pound of sales, 75 pence is gross profit.

Question 11

How can a business achieve a higher gross profit margin?

Answer 11

By providing significant added value, such as handmade goods or specialist services.

Question 12

What is the formula for calculating gross profit margin?

Answer 12

Gross profit margin (%) = (Gross profit ÷ Sales revenue) × 100.

Question 13

Why might a gross profit margin decrease even if sales revenue increases?

Answer 13

The cost of sales, like raw materials, might have risen faster than the prices charged to customers.

Question 14

How can businesses respond to a decreasing gross profit margin?

Answer 14

By increasing prices or negotiating lower costs for raw materials.

Question 15

What is the net profit margin?

Answer 15

The proportion of sales revenue left after all costs have been paid.

Question 16

What does the net profit margin tell a business?

Answer 16

How much net profit is made for every pound of sales revenue.

Question 16

What does a net profit margin of 32% mean?

Answer 16

For every pound of sales, 32 pence is net profit.

Question 17

Why is the net profit margin lower than the gross profit margin?

Answer 17

It accounts for more costs, including fixed costs and overheads.

Question 18

What does a decrease in net profit margin over time indicate?

Answer 18

Either costs have increased faster than sales revenue, or sales revenue has fallen faster than costs.

Question 18

What type of markets tend to have very small net profit margins?

Answer 18

Highly competitive markets, such as the food retail market.

Question 19

What is the formula for calculating the net profit margin?

Answer 19

Net profit margin (%) = (Net profit ÷ Sales revenue) × 100.

Question 20

How can comparing the net profit margin with the gross profit margin help a business?

Answer 20

It shows how significant fixed costs or overheads are.

Question 20

How can businesses use net profit margin comparisons over time?

Answer 20

To monitor changes in costs or sales revenue and identify opportunities to reduce fixed costs.

Question 21

Why do businesses make investment decisions?

Answer 21

To increase their profits.

Question 22

What might investment decisions involve

Answer 22

Choosing equipment, machinery, or larger premises.

Question 23

Why is it important for businesses to estimate the return on an investment?

Answer 23

To compare it with the return from leaving the money in the bank.

Question 23

What should an investment return exceed to make it worthwhile?

Answer 23

The interest the business could earn by keeping the money in the bank.

Question 24

What is the average rate of return?

Answer 24

A calculation that compares the profitability of different investment choices over their expected life

Question 25

Why is the average rate of return useful for comparing investments?

Answer 25

It accounts for investments lasting different periods of time.

Question 26

How does the average rate of return compare investments?

Answer 26

By comparing the average annual profit of an investment with its initial cost.

Question 27

Why is the financial position of a business crucial?

Answer 27

It influences all decisions the business makes.

Question 28

How can financial data help in business decisions?

Answer 28

It forecasts impacts on cash flow and profits.

Question 29

What are the two main types of marketing data?

Answer 29

Quantitative and qualitative data.

Question 30

where does marketing data often come from?

Answer 30

Market research.

Question 30

what are the two types of data that market research can provide?

Answer 30

Primary data and secondary data.

Question 31

Why is marketing data useful for businesses?

Answer 31

It helps in making informed business decisions.

Question 32

What type of data is often collected through primary research?

Answer 32

Both qualitative and quantitative data.

Question 32

Why is primary research especially useful for collecting qualitative data?

Answer 32

It gives detailed information about customer wants and buying behaviour.

Question 33

How can primary research help a business make decisions?

Answer 33

It helps decide which products to launch or what prices to charge.

Question 34

What kind of data is secondary research particularly good for?

Answer 34

Quantitative data about the market.

Question 35

Give an example of useful quantitative data from secondary research.

Answer 35

Total market sales value or market growth/shrinkage.

Question 35

How can quantitative data from secondary research help a business?

Answer 35

It helps decide whether to invest in existing products or develop new ones.

Question 36

What are examples of secondary research sources?

Answer 36

Internal sales figures and competitors’ market share.

Question 36

What is market data?

Answer 36

Information about the characteristics of a particular market, including economic and demographic factors.

Question 37

What types of factors does market data include?

Answer 37

Economic and demographic factors.

Question 38

How can market data affect a business?

Answer 38

It can influence consumer behaviour and demand for products/services.

Question 38

What are economic factors?

Answer 38

Factors related to money and wealth, such as incomes, exchange rates, interest rates, inflation, and unemployment.

Question 39

List five examples of economic factors.

Answer 39

Consumer incomes, exchange rates, interest rates, inflation rate, and unemployment rates.

Question 40

Why must businesses consider changes in economic factors?

Answer 40

Because they can affect customer purchasing decisions and business conditions.

Question 41

How might a rise in inflation affect a business?

Answer 41

It may increase costs, leading the business to decide whether to raise prices.

Question 41

What does demography refer to?

Answer 41

The composition of the population.

Question 42

What is demographic data useful for?

Answer 42

Helping businesses understand changes in population size, migration, and population structure.

Question 43

How could an ageing population affect a business that sells babywear?

Answer 43

It might lead to lower sales, as there are fewer younger people having children.

Question 43

what are some common ways to measure business performance?

Answer 43

Changes in costs, changes in revenue, gross profit, net profit, gross profit margin, and net profit margin.

Question 44

Where is most information for analysing business performance found?

Answer 44

In a business’s accounts.

Question 44

Why should care be taken when comparing the performance of two businesses?

Answer 44

Because they may have different accounting periods or policies.

Question 45

What is important when comparing performance data between businesses?

Answer 45

That the data is comparable.

Question 45

Why can performance be interpreted differently even within one business?

Answer 45

Because it depends on how the information is used and analysed.

Question 46

What three qualities should information used in business decisions have?

Answer 46

It should be accurate, sufficient, and up to date.

Question 46

Why must information be accurate and complete?

Answer 46

Inaccurate or incomplete data can lead to bad decisions, which may cause business failure.

Question 47

Why must information be sufficient?

Answer 47

One set of data is meaningless without context, such as historical data or comparisons with similar businesses.

Question 48

Why is context especially important for seasonal goods?

Answer 48

Because comparing sales in different seasons (e.g. summer vs winter) can give misleading results.

Question 48

Why must business data be up to date?

Answer 48

Outdated information may no longer reflect current market conditions.

Question 49

What besides time can make data go out of date?

Answer 49

Significant market changes, like new competitors entering the market.

Question 50

What is a limitation of using even accurate, sufficient, and up-to-date data?

Answer 50

The way the information is used can still have limitations.

Question 51

Give an example of a limitation when using the average rate of return.

Answer 51

It doesn't take inflation into account when comparing investment options.