Unit 5- Improve Financial Performance

Question 1

Formula for gross profit

Answer 1

Sales revenue - cost of sales

Question 2

Operating profit

Answer 2

Gross profit - expenses

Question 3

Formula for operating profit

Answer 3

Gross profit - expenses

Question 4

Formula for profit for the year

Answer 4

Operating profit - interest and taxation

Question 5

Financial objective

Answer 5

Monetary targets a business wants to achieve within a set amount of time

Question 6

ROI
(Return on investment)

Answer 6

The measure of a business’s profitability and performance

Operating profit/ capital invested x100

Question 7

2 sources of long term funding

Answer 7

•Equity (eg. Capital from shareholders)
•Debt (eg. Money borrowed)

Question 8

Gearing

Answer 8

The proportion of long term funding that is debt
(Highly geared businesses (having lots of debt) have higher risk)

Question 9

Formula for gearing

Answer 9

Debt/ total long-term funding x100

Question 10

3 types of budget

Answer 10

•income
•expenditure
•profit

Question 11

Budgets

Answer 11

Forecasts or forecasts lans for the future finances of a business

Question 12

Formula for profit budget

Answer 12

Income - expenditure =profit

Question 13

Process of setting budgets

Answer 13

1. Set clear objectives
2. Carry out market research
3. Produce a sales forecast
4. Set income budget
5. Set expenditure budget
6. Set profit budget
7. Set divisional targets
8. Review against objective

Question 14

Pros and cons of budgeting

Answer 14

+logical
+prevents overspending
+reduces risk

-structure/ inflexible
-only a prediction
-miss out on growth opportunities

Question 15

Variance

Answer 15

The difference between the predicted outcome of the budgets
(Favourable or adverse)
Eg increase in predicted costs would be an adverse variance