3.5 - Financial Management

Question 1

Why is profit important?

Answer 1

the return for taking a risk
profit measures the success of an investment
profit is an important source of finance

Question 2

What are good reasons to reinvest profit into a business?

Answer 2

an important and cheap source of finance
decision is in the control of the entrepreneur
profits are flexible - can invest some or all
shareholders will usually be supported

Question 3

How to increase profit

Answer 3

revenue:
- increase quantity sold
- increase selling price
Variable costs:
- reduce variable costs per product
Fixed Costs:
- increase output
- reduce fixed costs

Question 4

How to reduce losses

Answer 4

keep tight control of costs
try to minimise waste
dont take on too many people or expand too quickly

Question 5

What is net profit

Answer 5

what is left after all the costs of a business have been taken from the sales revenue

Question 6

How to calculate net profit margins

Answer 6

NPM = (Net Profit (before tax) / sales) x 100

expressed as a percentage

Question 7

What does net profit margin useful

Answer 7

how effectively a business turns its sales into profit
how efficiently a business is run
whether a business is able to ‘add value’ during the production process

Question 8

What is cash flow?

Answer 8

the difference between total cash inflows and total cash outflows over a period of time
the day to day money required to run a business
revenue eventually turns into cash inflows, costs eventually turns into cash outflows

Question 9

How to calculate net cash flow

Answer 9

net cash flow = cash inflows - cash outflows

Question 10

How can you improve cash flow

Answer 10

reduce outflows:
- reduce marketing
- change suppliers
- reduce/ restructure workforce
increase inflows:
increase production
- increase price
- increase sales

Question 11

What are some sources of finance to improve cash flow

Answer 11

Bank Overdraft
Bank Loans