managing finance

Question 1

profit

Answer 1

the difference between the revenue of a business and the costs generated by the business during a period of time

Question 2

how can a business identify what things are doing well or badly for them

Answer 2

by analysing the differences between the different types of profit

Question 3

different types of profit

Answer 3

gross , operating , net

Question 4

gross profit

Answer 4

this is a raw measure of profit that deducts costs from total revenue to show what is left after taking away the costs directly involved in making a product or providing a service

Question 5

operating profit

Answer 5

fixed overheads are deducted from gross profit. This is the clearest indicator of just how well a business has been run during a year. In simple terms - profit generated by the normal operating activities of the business

Question 6

net profit

Answer 6

shows profit net of all costs except for corporation tax = operating profit - net financing costs and corporation tax.

Question 7

fixed overheads meaning

Answer 7

are the costs that have to be paid no matter how well the business is performing, such as management salaries or rent

Question 8

net financing meaning

Answer 8

is the income from interest on bank deposits minus the interest charges from overdrafts and loans.

Question 9

ways to improve profit

Answer 9

• reduce costs

- increase revenue

Question 10

the trade offs involved in improving profit

Answer 10

increasing revenue - spending more on advertising, pushing up costs
reducing costs - making sacrifices on quality or customer service, which may in turn decrease revenues

Question 11

statement of comprehensive income

Answer 11

a document produced by a PLC that shows revenue, a break-down of different costs and different types of profit each year

Question 12

profit figures and figures that show profitability differences

Answer 12

profitability states profit figures as a percentage of sales revenue=
( x profit / sales revenue ) x 100

Question 13

ways to improve profitability

Answer 13

• increase selling price

- cut costs

Question 14

issues with improving profitability

Answer 14

• increasing selling price may increase profit margins but not overall profit, as an increase in price may lead to drastic falls in sales volume
• using cheaper materials to cut costs can ruin a companies reputation and thus revenues

Question 15

what kind of products are certain will have reduced profits once the price is increased

Answer 15

price elastic products

Question 16

why are cash inflows and revenue different? examples

Answer 16

taking out a bank loan of 20,000 will be considered an inflow but not revenue
credit sales made to customers will be considered revenue but not cash inflow

Question 17

liquidity

Answer 17

the ability of a business to find the cash it needs to pay its bills. the cash must be readily available either in the bank account or in the form of a payment from a customer.

Question 18

balance sheet (statement of financial position)

Answer 18

all limited companies must send a balance sheet to companies house each year to show what the firm owns and what it owes, where it got its money form

Question 19

what does it mean to measure liquidity

Answer 19

comparing the value of current assets against the current liabilities that will need to be paid. this can be done through two formulas: current ratio and acid test ratio

Question 20

current assets

Answer 20

items that businesses owns in the form of cash or can be easily turned into cash (e.g stock)

Question 21

current liabilities

Answer 21

are debts owed by the business that are due to be paid within the next 12 months. E.g overdrafts or trade creditors

Question 22

current ratio

Answer 22

current assets / current liabilities.

enables a simple judgement on the firms liquidity

Question 23

ideal value for current ratio

Answer 23

1.5:1

Question 24

what is the issue with current ratio falling above or below 1.5:1

Answer 24

lower: it will face problems settling short term debts
higher: too much resources tied up in non-productive assets

Question 25

acid test ratio

Answer 25

tougher liquidity test, does not count inventories as a liquid asset.
(total current - assets - inventories) / current liabilities

Question 26

ideal value for acid test ratio

Answer 26

1:1

Question 27

what is the issue with acid test ratio falling below 1.5:1

Answer 27

below: no cash to pay bills

Question 28

how can u improve liquidity

Answer 28

bringing extra cash into the balance sheet:

• selling under-used fixed assets like equipment or machinery
• raising more share capital
• increasing long term borrowing through loans
• postponing planned investments

Question 29

working capital

Answer 29

the money. that is available for the day to day running of the business

Question 30

why is important to manage working capital

Answer 30

crucial to successful financial management to prevent blockages or delays and ensure there is always enough working capital

Question 31

fixed assets

Answer 31

are items owned by the business which it intends to use over and over to generate profit. e.g property and machinery