Topic 2.3 Managing finance

Question 1

Calculating gross profit

Answer 1

Revenue - cost of sales

Question 2

Calculating Operating profit

Answer 2

Gross profit - expenses

Question 3

Calculating Net profit

Answer 3

Operating profit - Interest eg. tax/dividends

Question 4

Calculating gross profit Margin

Answer 4

Gross profit / Sales revenue x 100

Question 5

Calculating Operating profit Margin

Answer 5

Operating profit / Sales revenue x 100

Question 6

Calculating Net profit Margin

Answer 6

Net profit / sales revenue x 100

Question 7

Ways to improve profitability

Answer 7

• Raising prices
• Reducing variable costs eg. buy in bulk
• Reduce other expenses eg. staff

Question 8

Difference between profit and cash

Answer 8

• Profit is the difference between revenue generated and business costs
• Cash is measured by taking into account the full range of money flowing in and out of a business

Question 9

Calculating current ratio

Answer 9

Current assets / current liabilities

Question 10

Calculating acid test ratio

Answer 10

Current assets - inventories / current liabilities

Question 11

Ways to improve liquidity

Answer 11

• Reduce the amount of stock it holds
• Pay suppliers later (Trade credit)

Question 12

Calculating working capital

Answer 12

Current assets - current liabilities

Question 13

Managing working capital

Answer 13

Effective management of working capital involves
- Stock is less liquid so selling stock at cheaper prices to use it up
- using overdrafts can improve working capital as the business can access more cash then it has

Question 14

How can a business have to much working capital ?

Answer 14

• if a business is holding to much stock then it could cause higher storage costs and they have to much cash tied up in stock
• If a business is holding onto too much cash they are missing out on the benefits of investing it in fixed assets or just investing

Question 15

Internal causes of business failure (Poor planning)

Answer 15

• Ineffective business plan
• poor budgeting
• lack of research and innovation

Question 16

Internal causes of business failure (Lack of leadership)

Answer 16

• Poor decision making
• Failure to delegate
• Lack of skills

Question 17

Internal causes of business failure (Ineffective marketing + Cash flow problems)

Answer 17

• Poor market research
• Poor understanding of customer needs
• Promotional mistakes

Question 18

Internal causes of business failure (Lack of funds)

Answer 18

• Failure to attract investment
• Difficulties in borrowing

Question 19

External causes of business failure (Economic challenges)

Answer 19

• Recession
• Rising intrest rates
• Exchange rate fluctuations

Question 20

External causes of business failure (change in consumer tastes)

Answer 20

• Dates stock may be unsellable
• Costly market research as it is needed to be done frequently

Question 21

External causes of business failure (Legal factors)

Answer 21

• Products have to meet legal requirements
• Legal factors can affect production and operations

Question 22

External causes of business failure (Market challenges)

Answer 22

• Undercutting prices to become more competitive
• May cause businesses to not break even