2.3 managing finance

Question 1

Define profit

Answer 1

The difference between the revenue and costs generated by a business over a period of time

Question 2

What is the formula for gross profit

Answer 2

Total revenue - Cost of sales

Question 3

What is the formula for operating profit

Answer 3

Gross profit - fixed overheads

Question 4

Define fixed overheads

Answer 4

Costs which have to be paid no matter how well the business is performing

E.g. Salaries and rent

Question 5

What is the formula for net profit

Answer 5

Operating profit - (net financing costs and corporation tax)

Question 6

What are net financing costs

Answer 6

The income from interest minus the interest charged on loans and overdrafts

Question 7

What are the ways to improve profit

Answer 7

Increase revenue
Reduce costs

There is often a trade off between the two

Question 8

What is a statement of comprehensive income

Answer 8

A document produced by a PLC to show a break down of revenue, cost and profit for a year

Question 9

Define profitability

Answer 9

States profit as a percentage of sales revenue

Question 10

What is the formula for gross profit margin

Answer 10

Gross profit / sales revenue X 100 %

Question 11

What is the formula for operating profit margin

Answer 11

Operating profit / sales revenue x 100 %

Question 12

What is the formula for Net profit margin

Answer 12

Net profit / sales revenue x 100%

Question 13

What do profit margins mean

Answer 13

The higher the profit margin the better it is for the business

Question 14

What are ways to improve profitability

Answer 14

Increase selling price

Cut costs

Question 15

Why is profit no the same as net cash flow

Answer 15

Sales revenue does not equal cash inflows

Costs do not equal cash outflows

Question 16

Define Liquidity

Answer 16

The ability for a business to find the cash it needs to pay its bills

Question 17

What is a balance sheet

Answer 17

A document describing the financial position of a business , comparing what it owns (assets) and what it owes (liabilities)

Question 18

What is a current asset

Answer 18

Are assets which are cash or can be easily turned into cash

Question 19

What is a current liability

Answer 19

Are debts owed by a business that are to be paid in one year

Question 20

What is the formula for the current ratio

Answer 20

Current assets / Current liabilities

Question 21

What is the formula for the acid test ratio

Answer 21

(Total current assets - Inventories) / current liabilities

Question 22

What are ways of improving liquidity

Answer 22

Selling under used fixed assets (equipment or machinery)
Raising more share capital
Increasing long term borrowing through loans
Postponing planned investments

Question 23

Define fixed assets

Answer 23

Items used by a business which is used to generate profits

Question 24

Define profitability

Answer 24

The profit as a percentage of sales revenue

Question 25

What is working capital Why is it essential

Answer 25

The money available for the day to day running of the business Is it needed to make sure a business can operate and pay for materials, labour, capital

Question 26

What is an income statement

Answer 26

A financial document from a business of the gross profit, operating profit and net profit

Question 27

What is business failure

Answer 27

Where a company fails due to its inability to make profits or cover its expenses

Question 28

What are the internal causes of market Give examples

Answer 28

Marketing failure (poor decisions in the marketing mix) Financial failure ( cash flow crisis) Operations failure (physical systems break down) Poor leadership (bad decisions)

Question 29

What are the external causes of business failure Give examples

Answer 29

Change in technology (competitors have new tech to produce faster) New competitor (could operate more effectively) Economic change (economy may fall, decreased demand) Behaviour of banks (can charge higher interest rates)

Question 30

What is the acid test ratio

Answer 30

It is used as an indicator as to whether a firm has sufficient current assets to cover its current liabilities