Making Financial Decisions

Question 1

What is gross profit?

Answer 1

Gross profit is the profit that a business makes on its trading activity before any indirect costs have been deducted.

Question 2

What is net profit?

Answer 2

Net profit (also known as the bottom line) is the profit that a business is able to return to shareholders (owners) or reinvest back into the business.

Question 3

How can a business improve their profit?

Answer 3

By lowering costs or increasing revenue. However this can cause problems.

Question 4

What is the problem of increasing profit by lowering costs or increasing revenue?

Answer 4

The problem with increasing revenue is that the methods used can also increase costs.
The problem with lowering costs is that doing so can detract from the value of the product or service, reducing the business’s ability to make revenue.

Question 5

What is a profit margin?

Answer 5

Is the ratio of profit compared to sales revenue.

Question 6

What do Profit margins give an indication of?

Answer 6

Profit margins give an indication of a product’s profitability.

Question 7

Why do businesses calculate the average rate of return that it receives?

Answer 7

The calculation is used to compare different investment opportunities to identify which is the most profitable.

Question 8

What is the average rate of return?

Answer 8

Is the average annual amount of profit generated over the life of an investment.

Question 9

What will a business use data for?

Answer 9

Monitor the performance of the business
Compare its performance with that of its competitors
Anticipate the needs of customers or identify trends in the market
Make business decisions, e.g. production volume and sales targets
Set business aims and objectives

Question 10

Graphs and charts can be created using quantitative data to do what?

Answer 10

Demonstrate the relationships or correlation between two sets of data
Represent proportions (percentages)
Show trends over time and make forecasts
Measure the performance of a business
Identify unusual factors or events, and their impact on the business

Question 11

What is quantitative data?

Answer 11

Information that can be expressed in numbers, such as percentages, ratios, profits and indices.

Question 12

What are three important types of data that businesses use to make decisions?

Answer 12

Marketing data
Financial data
Market data

Question 13

What are some examples of marketing data?

Answer 13

Customer satisfaction ratings
Customer visits
Customer opinions

Question 14

What are some examples of financial data?

Answer 14

Costs 
Sales figures/revenue 
Financial accounts 
Interest rates 
Tax rates

Question 15

What are some examples of market data?

Answer 15

Demographics
Number of competitors
Size of market
Growth of market

Question 16

What are some limitations of financial data?

Answer 16

It is historical- when using financial data, businesses will make decisions about the future based on past performances
The reasons behind the numbers- the fact that sales revenue has fallen might not be as important as understanding the market factors that led to the fall in revenue
Statistics can be manipulated- facts can be expressed in different ways to give them a different emphasis
Business performance is not solely judged on financial performance- there are many other qualitative factors that need to be considered, e.g. business reputation and employee motivation