2.3 Managing finance

Question 1

What are the 3 types of profit

Answer 1

Gross- Difference between revenue and cost of sales

Operating- Takes into account other operating expenses on top of gross profit

Profit for the year (net profit)- the ‘actual’ profit the business has made

Question 2

How to calculate gross profit

Answer 2

Revenue - cost of sales

Question 3

How to calculate operating profit

Answer 3

Gross profit - other operating expenses

Question 4

How to calculate profit for the year

Answer 4

Operating profit +/- interest

Question 5

How does working out the gross profit margin of a business help

Answer 5

Helps answer the question ‘Have our products been successful?’

Question 6

How to calculate gross profit margin

Answer 6

Gross profit / revenue x 100

Question 7

How does working out operating profit margin help a business

Answer 7

Takes into account the performance of the business due to including direct and indirect costs

Question 8

How to calculate operating profit margin

Answer 8

Operating profit / revenue x 100

Question 9

How does working out net profit help a business

Answer 9

It is a good measure of how effectively the business performed over the financial year

Question 10

How to calculate net profit margin

Answer 10

Net profit / revenue x 100

Question 11

What are 4 ways to increase revenue

Answer 11

• Increase prices
• Reduce process
• Create awareness and desire through marketing
• Add value to the product

Question 12

Why might businesses be unprofitable

Answer 12

• No demand for product
• Selling at wrong price
• Low contribution per unit
• Poor management of costs
• Expansion of the business

Question 13

What are 6 ways to reduce costs

Answer 13

• Reduce production costs
• Improve efficiency
• Use capacity more fully
• Eliminate unprofitable processes e.g some product lines
• Lower overheads- move to a cheaper location

Question 14

Why is managing cash flow important

Answer 14

As this allows for a business to be profitable

This is done by managing cash flows so that it can pay expenses and running costs, these expenses usually occur before revenue is generated

Question 15

Examples of non-current assets

Answer 15

Land and machinery

Question 16

Example of current assets

Answer 16

Stock

Question 17

How to calculate net current assets

Answer 17

Current assets - current liabilities

Question 18

How to calculate net assets

Answer 18

Total assets - total liabilities

Question 19

What are non-current liabilities

Answer 19

debts that a business doesn’t expect to pay off within a year

Question 20

What are current liabilities

Answer 20

debts a business expects to pay off within 12 months

Question 21

What can balance sheets show

Answer 21

• The value of the business (equity)
• The current assets a business holds
• Short-term liabilities the business will need to pay within the year
• The liquidity of the business
• The long-term debts of a business
• How a business has been financed

Question 22

Define liquidity

Answer 22

the ability of a business to pay its debts and liabilities in cash when they fall due

Question 23

How to calculate current ratio

Answer 23

Current assets / current liabilities

Question 24

how to calculate the acid test ratio

Answer 24

Current assets - stock / current liabilities

Question 25

What does the ratio mean when referring to liquidity

Answer 25

E.g. if the ratio was 2:1, it suggests that the business has £2 of current assets for every £1 of current liabilities If the ratio is less than 1, e.g. 0.5 then the business may struggle to pay off its short term debts

Question 26

How to calculate working capital

Answer 26

Current assets - current liabilities

Question 27

Define working capital

Answer 27

The money within a business that is needed to pay for the day-to-day running costs, e.g. bills and wages

Question 28

What are some ways to improve liquidity of a business

Answer 28

- Negotiate additional short- term loans - Use an overdraft facility - Encourage cash sales - Encourage early settlement of debts - Sell off current assets (stock) - Delay payments - Take out credit agreements with suppliers

Question 29

What are internal reasons for business failure

Answer 29

- Cash flow - Poor planning - Lack of skills - Marketing

Question 30

What are some external reasons for business failure

Answer 30

- Economic conditions - Market conditions - Legislation - Competition

Question 31

How can poor planning mean business failure

Answer 31

As this could be the root of the problem for other issues such as cash flow problems through a lack of understanding customer needs

Question 32

How may a lack of skills mean business failure

Answer 32

As this may include technical skills, such as financial management which is vital to a businesses success

Question 33

What are causes of cash-flow problems

Answer 33

- Overtrading - Allowing too much trade to creditors - Poor credit control - unforeseen costs - inaccurate cash flow management

Question 34

How do the external factors cause business failure

Answer 34

Competition- can lead to shortage of demand and falling sales Legislation- Can increase costs to adjust its products to comply Market conditions- changes in commodity prices or consumer tastes