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Flashcards in Making Financial Decisions Deck (16):

What is gross profit?

Gross profit is the profit that a business makes on its trading activity before any indirect costs have been deducted.


What is net profit?

Net profit (also known as the bottom line) is the profit that a business is able to return to shareholders (owners) or reinvest back into the business.


How can a business improve their profit?

By lowering costs or increasing revenue. However this can cause problems.


What is the problem of increasing profit by lowering costs or increasing revenue?

The problem with increasing revenue is that the methods used can also increase costs.
The problem with lowering costs is that doing so can detract from the value of the product or service, reducing the business’s ability to make revenue.


What is a profit margin?

Is the ratio of profit compared to sales revenue.


What do Profit margins give an indication of?

Profit margins give an indication of a product’s profitability.


Why do businesses calculate the average rate of return that it receives?

The calculation is used to compare different investment opportunities to identify which is the most profitable.


What is the average rate of return?

Is the average annual amount of profit generated over the life of an investment.


What will a business use data for?

Monitor the performance of the business
Compare its performance with that of its competitors
Anticipate the needs of customers or identify trends in the market
Make business decisions, e.g. production volume and sales targets
Set business aims and objectives


Graphs and charts can be created using quantitative data to do what?

Demonstrate the relationships or correlation between two sets of data
Represent proportions (percentages)
Show trends over time and make forecasts
Measure the performance of a business
Identify unusual factors or events, and their impact on the business


What is quantitative data?

Information that can be expressed in numbers, such as percentages, ratios, profits and indices.


What are three important types of data that businesses use to make decisions?

Marketing data
Financial data
Market data


What are some examples of marketing data?

Customer satisfaction ratings
Customer visits
Customer opinions


What are some examples of financial data?

Sales figures/revenue
Financial accounts
Interest rates
Tax rates


What are some examples of market data?

Number of competitors
Size of market
Growth of market


What are some limitations of financial data?

It is historical- when using financial data, businesses will make decisions about the future based on past performances
The reasons behind the numbers- the fact that sales revenue has fallen might not be as important as understanding the market factors that led to the fall in revenue
Statistics can be manipulated- facts can be expressed in different ways to give them a different emphasis
Business performance is not solely judged on financial performance- there are many other qualitative factors that need to be considered, e.g. business reputation and employee motivation