2.3 Managing Finance

Question 1

ways to improve profitability:

Answer 1

• reducing costs
• increasing turnover
• increasing productivity
• reduce product range
• outsource non-essential functions

Question 2

difference between cash and profit

Answer 2

cash shows how much money moves in and out of your business, while profit illustrates how much money is left after the expense have been paid

Question 3

improving profitability
reduce product range

Answer 3

• business often have too many products = complex operations & inefficiency
• products may be low margin or even loss-making

Question 4

improving profitability
outsource non-essential functions

Answer 4

• way of reducing fixed costs
• focus on business on what it is good at
• areas to outsource, IT, finance

Question 5

profit definition

Answer 5

the reward or return for taking risks and making investments

Question 6

gross profit equation

Answer 6

revenues - cost of sales

Question 7

operating profit equation

Answer 7

gross profit - expense & overheads

Question 8

gross profit margin equation

Answer 8

gross profit / sales revenue x 100

Question 9

operating profit margin equation

Answer 9

operating profit / sales revenue x 100

Question 10

net profit equation

Answer 10

operating profit - finance expenses - tax

Question 11

net profit margin equation

Answer 11

net profit/ sales revenue x 100

Question 12

what is the statment of financial positon also known as

Answer 12

balanced sheet

Question 13

what is a balance sheet

Answer 13

shows the financial position of a firm on a given day. what it owns (assets) and what it owes (liabilities). its a snapshot of the business and is used by investors to see if its worth investing in

Question 14

what are non-current assets

Answer 14

create revenue and allows them to make profits. they are kept by the business for more than a year
e.g. vehicles, machinery

Question 15

what are current assets

Answer 15

firms will keep them for a short time (less than a year) they area able to be turned to cash within a year
e.g. inventories (stocks), receivables (debtors)

Question 16

what are liabilities

Answer 16

money business owes e.g. debt

Question 17

what are current liabilities

Answer 17

debt the business will pay within a year
e.g. overdrafts, payable, tax

Question 18

what are non-current liabilities

Answer 18

debts that the business has more than one year to repay
e.g. bank loans, mortgages

Question 19

what is liquidity

Answer 19

ability of a firm to meet its short term commitments

Question 20

what is a liquidity ratio

Answer 20

asses whether a business has sufficient cash or cash equivalent current assets to be able to pay it debts as they fall due

Question 21

current ratio equation

Answer 21

current assets / current liabilities

Question 22

how to interpretate current ratios

Answer 22

• 1.5-2.0 suggest efficient management of working capital
• low ratio (<1) indicates cash problems
• high ratio: too much working capital

Question 23

acid test ratio equation

Answer 23

current assets - stocks / current liabilities

Question 24

interpretating acid test ratio

Answer 24

• <1 is bad news
• less relevant for business with high stock turnover

Question 25

What are inventories?

Answer 25

a list of all the stock that is held by a business, it will either be used in production or sold

Question 26

What are receivables?

Answer 26

Debt, owed to a firm by its customers for goods/services used or delivered, but not yet paid for

Question 27

What are cash and cash equivalents?

Answer 27

Items on the balance sheet that reports the value of a company’s assets that are cash or can be converted into cash immediately

Question 28

What are total current assets?

Answer 28

The resources that a business owns and expects to use or sell within a year

Question 29

What are net current liabilities

Answer 29

Current assets minus current liabilities of an organisation

Question 30

What are reserves/retained earnings?

Answer 30

Portion of a company’s net income that is kept by the company rather than being distributed as dividends

Question 31

What is total equity?

Answer 31

Difference between a companies assets and its liabilities

Question 32

What are the distribution and administration expenses?

Answer 32

Expenses that are necessary for normal business operations were not related to the cost of goods or sales

Question 33

what is an income statement?

Answer 33

measure business performance over a given period of time, usually one year. It compares the income of the business against the cost of goods or services and expenses incurred in earning that revenue

Question 34

what is a cash flow statement

Answer 34

this shows how the business has generated and disposed of cash and liquid funds during the period under review

Question 35

what is working capital (net current assets)

Answer 35

money that a business has to fund its day-to-day activities

Question 36

how to manage working capital

Answer 36

- extension payment from suppliers - Make use of short-term borrowing - if struggling with liquidity convert current assets into cash, quickly

Question 37

Internal causes of business failure

Answer 37

- poor planning - lack of leadership - ineffective marekting - cash flow problems - lack of funds - ineffective management

Question 38

External causes of business failure

Answer 38

- economic challenges - change in consumer tastes - legal factors - market challenges - technological change

Question 39

how legislation can lead to business failure

Answer 39

Products or processes may require significant redesign or withdrawal

Question 40

How economic changes can lead to business failure

Answer 40

firms that rely heavily on borrowing or sell items that require firms to borrow money to finance the purchase