2.3- Managing Finance

Question 1

What is liquidity?

Answer 1

The ability of a business to turn it’s assets into cash to pay it’s current liabilities.

Question 2

What are fixed assets?

Answer 2

Assets that the business buy in order to use.

Question 3

What are current assets?

Answer 3

Assets that are brought to be turned into cash within a year.

Question 4

What is current liability?

Answer 4

Payable within 1 year.

Question 5

What are examples of short term liability?

Answer 5

Creditors, bank overdraft.

Question 6

What are examples of long term liability?

Answer 6

Mortgages, loans, lease.

Question 7

What are dividends?

Answer 7

The profit that you make on shares.

Question 8

What is the equation to measure liquidity?

Answer 8

Current ratio= Current assets/ Current liabilities

Question 9

What is the equation of Acid Test Ratio?

Answer 9

Acid Test Ratio= CA- Inventory/ current liabilities

Question 10

What is profit?

Answer 10

Profit is the financial gain of a business through trading and can be found by deducting expenditure from income. P= TR- TC.

Question 11

What are the 3 types of profit?

Answer 11

• Gross profit
• Operating profit
• Net profit

Question 12

What is a ‘statement of comprehensive law’?

Answer 12

PLC’s and Ltd’s need to publish their accounts every year, this is UK law. Part of those accounts they need to show their profit and loss, this appears in the ‘statement of comprehensive law’.

Question 13

How do you work out Gross profit?

Answer 13

Gross profit= Sales revenue- Costs of sales

Question 14

How do you work out operating profit?

Answer 14

Operating profit= Gross profit- Expenses.

Question 15

How do you work out Net profit?

Answer 15

Net profit= operating profit- Interest

Question 16

How do you work out the gross profit margin?

Answer 16

Gross profit margin= (Gross profit/ sales revenue) X100

Question 17

How do you work out the operating profit margin?

Answer 17

Operating profit margin= (operating profit/sales revenue) X100

Question 18

How do you work out net profit margin?

Answer 18

Net profit margin= (Net profit/sales revenue) X100

Question 19

How can a business improve their profitability?

Answer 19

Tom probe profitability a business must either increase their revenue or reduce their costs.

Question 20

What are the features of Cash within a business?

Answer 20

• Cash will not recorded until it is paid out or received which could be in a different trading year.
• A profitability business may go bust if it runs out of cash to pay a supplier or ways of staff.
• If owners introduce cash via savings or a loan this will not affect the profit figure.

Question 21

What is business failure?

Answer 21

Business failure is when a business ceases to trade or when a business does not trade in a profitable way or when a business makes a terrible decision.

Question 22

What are 4 internal causes of business failure?

Answer 22

1. Poor efficiency
2. Poor marketing
3. Failure to innovate
4. Bad management of working capital

Question 23

What does poor efficiency within a business entail?

Answer 23

An example of aggressive and disastrous expansion plans.
- Unrealistic sales forecasts can lead to over expansion.

Question 24

What does poor marketing within a business entail?

Answer 24

• Products and businesses have to move promptly with trends/ the outside world.
• An example is a roll film business going digital.

Question 25

What does poor management of working capital within a business entail?

Answer 25

• Working capital performance is a measure of efficiency that compares a business’ assets to it’s liabilities.
• Inability to manage cash flow is the most common reason businesses fail (not enough cash to pay bills on demand).

Question 26

What are the 2 external factors that can contribute to business failure?

Answer 26

• Economic recession
• Strong pound (reduced export demand)

Question 27

What is an economic recession and how does it contribute to business failure?

Answer 27

• If the economy fails to grow in 2 consecutive quarters that country will enter economic recession.
• As a country enters economic recession, customers start to save rather than buy.
• They put off decisions to purchase large expensive items.
• Some businesses will fail in recession, some with thrive.

Question 28

How does the strong pound contribute to business failure?

Answer 28

• Strong pound means that manufacturing businesses who heavily export will be affected.
• Means that their goods/ products that they manufacture will cost their customers more.
• Some businesses shift production overseas to counter this effect but not all can afford to do this.