Unit 3 - Business Finance (Account analysis)

Question 1

Ratio analysis

Answer 1

When two figures are compared in order to analyse financial accounts more accurately, this is called ratio analysis.
- Profitability ratios: Measures the performance of the business and focus on profit, revenue and the amount invested in the business.
- Liquidity ratios: measures how easily a business can pay its short-term debts. Such as wages or suppliers.

Question 2

Gross profit margin

Answer 2

Gross profit margin compares a business’s gross profit for a trading period with the revenue for the same period using the formula.

Gross profit margin = (Gross profit/revenue) x 100

Question 3

Ways to improve the GPM (%)

Answer 3

• Increase sales revenue
• Lower cost of sales

Question 4

Increase the business’s sales revenue

Answer 4

• Lowering the selling price may increase demand
• Increasing the price may generate more revenue
• Increase awareness of the product

Question 5

Lower the cost of sales

Answer 5

• Cut down on the price paid to existing suppliers
• Change suppliers
• Review their existing products and see if they could be made more cheaply

Question 6

Operating profit margin

Answer 6

Operating profit margin compares a business’s net profit for a trading period with the revenue using the following formula:

Operating profit margin = (Operating profit/revenue) x 100

Question 7

Improving the operating profit margin (%)

Answer 7

• Increase its sale revenue
• Lower expenses

Question 8

Increase business’s revenue

Answer 8

• Lower the selling price
• Increase the selling price
• Increase awareness of the product through promotion

Question 9

Lower expenses

Answer 9

• Delayer the organisational structure
• Review salary structure or bonuses
• Freeze recruitment
  -Move to a cheaper location

Question 10

ROCE

Answer 10

• Return On Capital Employed (ROCE)

ROCE = (Operating profit/Total capital employed) x 100

Capital employed = Long term liabilities + share capital + retained profit

Question 11

Current ratios

Answer 11

Current ratio accesses the business liquidity by dividing the current liabilities into the current assets.

Current ratio = current assets/current liabilities

Question 12

Acid test

Answer 12

Acid test is similar to the current ratio but does not include stock.

Acid test = (Current assets - inventory (stock))/current liabilities

Question 13

The use of financial documents

Answer 13

• Assess the performance of the business
• To make informed decisions

Question 14

Assess the performance of the business

Answer 14

Managers: Indication of their performance. Compare against competitors
Employees: Negotiate pay increases of preforming well. Job security
Owners: Review if they should invest more. Potential dividend return
External Stakeholders: Banks to check if suitable when giving loans. Suppliers to check if they should offer credit