Managing Finance 2.3

Question 1

Calculations for Gross profit, operating profit and net profit

Answer 1

Gross profit = Revenue - costs of sale (variable costs)
Operating profit = Gross profit - Other expenses (fixed)
Net profit = Operating profit - tax

Question 2

Calculations for gross, operating and net profit margin

Answer 2

((Gross/operating/net profit)/Revenue) x 100

Question 3

What does a low profit margin mean?

Answer 3

A business is inefficient because it is spending a lot of money on costs and so not gaining high profits

Question 4

How can a business improve their profit margin?

Answer 4

Increasing revenues by increasing prices or by lowering costs.

Question 5

What are 5 examples of a business trying to improve their profitability?

Answer 5

Making staff redundant, reducing employee wages, changing to a cheaper location, changing to a cheaper supplier, increasing prices

Question 6

What is the distinction between cash and profit?

Answer 6

Profit is the difference between the price of the good sold compared to the cost of production so, profit is calculated after a sale is made. Cash is an indication of a businesses inflows and outflows which can be profited once debtors bay creditors.

Question 7

What are debtors and creditors?

Answer 7

Debtors = Someone who owes money
Creditor = someone who is owed money

Question 8

What is an income statement?

Answer 8

Compares the income of a business to the costs and expenses of goods and services. Measures the businesses performance

Question 9

What is a statement of financial position?

Answer 9

Snapshot of the business assets and its liabilities on a particular day

Question 10

What is a cash flow statement?

Answer 10

How the business has generated and disposed of cash and liquid funds during the period under review.

Question 11

What are a businesses current assets?

Answer 11

Assets which a business is able to turn into cash quickly

Question 12

What are a businesses current liabilities?

Answer 12

Short-term debts which a business will need to pay quickly using its current assets

Question 13

What are non-current assets?

Answer 13

Assets which cannot be turned easily into cash

Question 14

What are non-current liabilities?

Answer 14

Debts that a business will have to pay in the long-term

Question 15

What is liquidity?

Answer 15

The ease at which a business can quickly turn its current assets into cash to pay its current liabilities

Question 16

What is a balance sheet?

Answer 16

A document showing the liabilities and assets of a business and therefore giving an insight into the liquidity of a business

Question 17

Measuring liquidity using current ratio:

Answer 17

Current assets/current liabilities
How many assets a business has to pau current liabilities
Higher ratio is an indication that a business is more likely to pay of its debts

Question 18

Measuring liquidity using acid test ratio:

Answer 18

Current assets - stock/liabilities

It does not assume that all stock will be sold so, it is likely to be much lower than current ratio

Question 19

Ways to improve liquidity?

Answer 19

Pay suppliers later: Extending period of paying current liabilities for them to then become non-current liabilities. This gives the business time to improve its liquidity
Increase long term borrowing: Give a business time to improve liquidity

Question 20

What is working capital and the formula?

Answer 20

Current assets - current liabilities

Money a business has to meet its day to day activities

Question 21

What is the cycle of working capital?

Answer 21

The time it takes to convert net current assets and current liabilities into cash

Question 22

What will ensure a business does not go bankrupt?

Answer 22

Current assets must be higher than current liabilities. A business must be able to manage its working capital to prevent shortages of cash.

Question 23

What are some internal causes of business failure?

Answer 23

Inefficiency, Poor market research, Failure to innovate, Poor cash flow management, Lack of capital leading to excessive borrowing, poor leadership

Question 24

Explain how poor cash flow management might cause business failure.

Answer 24

If a business fails to manage its cash flow, it may have expenses that need to be paid therefore less current assets than its current liabilities. This might financially put the business at risk of being unable to pay its debts therefore causing risk of failure

Question 25

What are some external factors that might cause business failure.

Answer 25

Competition increased, a stronger pound, Government policies and recessions

Question 26

Explain how a recession may cause business failure

Answer 26

If there is a sudden change to a economic conditions from a recession, this may decrease demand as people can afford less. This may therefore mean a decrease in sales for businesses, decreasing revenues and risk of failure.

Question 27

Examples of Non current and current assets

Answer 27

Non current assets - Machinery, vehicles and premises

Current assets - cash and inventories and receivables

Question 28

Examples of current and non current liabilities

Answer 28

Non current - Bank loans (mortgages)

Current - Overdrafts and accounts payable (creditors)