2.3 managing finance

Question 1

what is the formula for profit?

Answer 1

• total revenue - total costs

Question 2

what is gross profit?

Answer 2

• the difference between revenue and cost of sales

Question 3

what is the formula for gross profit?

Answer 3

• revenue - cost of sales

Question 4

what is operating profit?

Answer 4

• the difference between gross profit and business overheads

Question 5

what is the formula for operating profit?

Answer 5

• gross profit - other operating expenses

Question 6

what is profit of the year/net profit?

Answer 6

• the difference between operating profit and interests/exceptional items

Question 7

what is the formula for net profit?

Answer 7

• operating profit - exceptional items/interest

Question 8

what is a comprehensive income statement?

Answer 8

• shows how much profit or loss has been made at the end of a financial year

Question 9

what is a gross profit margin?

Answer 9

• measures the relationship between gross profit and revenue, assets and capital employes

Question 10

what is the formula for gross profit margin?

Answer 10

• gross profit
  ——————- X 100
  revenue

Question 11

what is a operating profit margin?

Answer 11

• measures the relationship between operating profit and revenue, assets and capital employed

Question 12

what is the formula for operating profit margin?

Answer 12

• operating profit
  ————————- X 100
  revenue

Question 13

what is a problem caused by low liquidity?

Answer 13

• struggle to pay suppliers

Question 14

what are ways to solve a short term liquidity crisis?

Answer 14

• sell assets

- delay payments

Question 15

what is liquidity?

Answer 15

• the ease with which assets can be converted into cash

Question 16

what is a current ratio?

Answer 16

• measures the liquidity of a business

Question 17

what is the formula for current ratio?

Answer 17

• ## current assetscurrent liabilities

Question 18

what is a sufficient liquidity ratio?

Answer 18

• between 1.5:1 and 2:1

Question 19

what is an acid test ratio?

Answer 19

• a more severe test of the liquidity of a business

- inventories (stock) are not treated as liquid assets

Question 20

what is the formula for the acid test ratio?

Answer 20

• ## current assets - stockcurrent liabilities

Question 21

what are ways to improve profitability?

Answer 21

• raise your price
• lower your costs
• operate more efficiently

Question 22

what is a statement of financial position?

Answer 22

• shows what the business owns and what it owes

Question 23

what is a statement of financial position split into?``

Answer 23

• assets
• liabilities
• capital

Question 24

who is a debtor?

Answer 24

• owe us money

Question 25

who is a creditor?

Answer 25

-we owe money

Question 26

what are non-current assets?`

Answer 26

- the assets the business owns and expects to keep for more than 1 year

Question 27

what are current assets?

Answer 27

- cash or the things a business owns that it wants to turn into cash within 1 year - e.g raw materials, stock, cash

Question 28

what are non current liabilities?

Answer 28

- debts a business has to pay over more than one year | - e.g. bank loan

Question 29

what are current liabilities?

Answer 29

- debts a business has to pay within one year | - e.g. gas, electric, suppliers

Question 30

what is capital?

Answer 30

- how the business is funded

Question 31

what is working capital?

Answer 31

- the capital of a business which is used in its day to day trading operations

Question 32

what is the formula for working capital?

Answer 32

- current assets - current liabilities

Question 33

what is a liquidity ratio?

Answer 33

- the ratio between the liquid assets and the liabilities of a bank or other institutions

Question 34

what is the formula for net assets?

Answer 34

- non current assets + net current assets - non current liabilities

Question 35

what is the formula for total equity?

Answer 35

- share capital + retained profit + any other reserves

Question 36

what is the formula for assets employed?

Answer 36

- non current assets + net current assets

Question 37

what is the formula for capital employed?

Answer 37

- total equity + non current liabilities

Question 38

what two parts of a statement of financial position should be the same?

Answer 38

- net assets and total equity

Question 39

what are high risks of starting a business?

Answer 39

- high rate of failure for start ups - difficult to test a model without trading - easy to be over optimistic - competitor response is often aggressive

Question 40

why might a new business fail?

Answer 40

- no demand for the idea - good idea, poorly executed - external shock

Question 41

what are financial reasons a established business fails?

Answer 41

- poor management of cash flow | - inadequate or inappropriate financing

Question 42

what are non financial reasons why an established business fails?

Answer 42

- lack of management control

Question 43

what is administration?

Answer 43

- a failing business appoints a specialist to rescue the business or wind it up

Question 44

what is overtrading?`

Answer 44

- the situation where a business does not have enough cash to support its production and sales usually because it is growing to fast

Question 45

what is Pareto's law?

Answer 45

- 80% of revenue comes from 20% of customers