Managing Finance 2.3

Question 1

What is the equation for gross profit?

Answer 1

Revenue - cost of sales

Question 2

What is the equation for operating profit?

Answer 2

Gross profit - fixed overheads

Question 3

What is the equation for net profit (profit for the year)?

Answer 3

Operating profit - financing and tax

Question 4

What are the three types of profit?

Answer 4

1. Gross profit
2. Operating profit
3. Net profit

Question 5

What is revenue?

Answer 5

Value of all the sales to customers

Question 6

What is cost of sales?

Answer 6

The cost of all raw materials needed

Question 7

What are the fixed overheads?

Answer 7

The cost of rent, salaries and bills (electricity and advertising)

Question 8

What are public limited companies (plc) required to do?

Answer 8

They have to state their annual profits in a document called ‘statement of comprehensive income’. The document sets out the revenues generated in the year with all the costs included. From this the three different types of profit can be measured. The after- tax net profit shows how much the directors can pay out in shareholder dividends.

Question 9

What is the gross profit margin calculation?

Answer 9

Gross profit margin = gross profit/ sales revenue x 100

Question 10

What is the operating profit margin calculation?

Answer 10

Opm = operating profit/ sales revenue x 100

Question 11

what is the calculation for the net profit margin?

Answer 11

npm = profit for the year/ sales revenue x100

Question 12

what are 3 ways of improving profits?

Answer 12

1. increase revenue
2. decrease costs
3. do a combination of both 1 and 2

Question 13

what are two ways to improve profitability?

Answer 13

1. Increase the price

2. cut costs

Question 14

what does a business need to be careful of when cutting costs?

Answer 14

not cutting quality

Question 15

how do you distinguish revenue from cash inflow?

Answer 15

revenue is the value of sales made over a specified period, which could be by cash, credit card or a store card, but the cash in is just the money made from the cash.

Question 16

what is the definition of corporation tax?

Answer 16

a levy on the incomes of companies (i.e. you pay a percentage of your pre tax profit)

Question 17

what is the definition for dividends?

Answer 17

annual payments made to shareholders

Question 18

what is the definition of fixed overheads?

Answer 18

the indirect costs that have to be paid however the business is performing (rent)

Question 19

what is the difference between gross profit and operating profit?

Answer 19

fixed overheads

Question 20

how to measure liquidity:

Answer 20

identify the current liabilities (bills) and the current assets, and as long as the current assets is higher than the liabilities then the company has sound liquidity.

Question 21

what is the calculation for current ratio?

Answer 21

current ratio = current assets/ current liabilities

Question 22

what is the idea current ratio?

Answer 22

1.5:1. so this is £1.50 of assets for every £1 of debt. any higher than this and the business could be criticised for having too many resources tied up in unproductive assets and a low current ratio means the business may not be able to pay back its debts.

Question 23

what is the acid test ratio?

Answer 23

it examines the businesses liquidity position by comparing current assets and liabilities but it omits stock from the total currents assets.

Question 24

what is the formula for acid test ratio?

Answer 24

(current assets - inventories)/ current liabilities

Question 25

what is the ideal acid test ratio?

Answer 25

1:1. this shows the organisation has £1 of highly liquid assets to every £1 short term debt

Question 26

what are 4 ways to improve liquidity?

Answer 26

1. selling under fixed assets 2. raising more share capital 3. increasing long term borrowings 4. postponing planned investments

Question 27

what is the working capital cycle?

Answer 27

(capital is injected into the business) > sell to customers on credit > customers (debtors) pay up > buy materials > produce goods (back to selling to customers)

Question 28

what two things is managing capital about?

Answer 28

1. ensuring the business has enough finance to meet its needs 2. keeping cash moving rapidly through the cycle, so there is enough to meet all future orders

Question 29

why is useful to have a generous overdraft limit?

Answer 29

in case of an unexpected events. for example - a major customer gets into financial difficulties and is unable to pay the bills on time or the cost of materials rises quickly

Question 30

What 4 ways can businesses control the amount of cash?

Answer 30

1. minimising stock levels 2. keeping customer credit as low as possible 3. trying to get as much credit from suppliers as you can 4. getting goods to the armlet in the shortest possible time, the sooner the goods reach the customer the sooner the payment is received

Question 31

what three aspects is the working capital management centred on?

Answer 31

1. control cash used 2. minimise spending on fixed assets 3. plan ahead by estimating cash needed

Question 32

Definition of contingency finance:

Answer 32

planning for the unexpected by either keeping a cash cushion in the firms current account or keeping an overdraft facility little-used

Question 33

definition of credit period?

Answer 33

the length of time a supplier allows a buyer to wait before paying

Question 34

Definition of liquidation:

Answer 34

closing the business down by selling off all the assets, paying debts and returning what is left to shareholders

Question 35

Definition of liquidity?

Answer 35

the ability of a business to pay its bills on time, which all depends on having enough cash in the bank

Question 36

Definition of working capital cycle?

Answer 36

how long it takes for a complete cycle from cash out (buying stock) to cash back in from a customer payment. it could vary from one day to one year

Question 37

3 internal reasons for business failure:

Answer 37

1. a marketing failure 2. a financial failure 3. a systems failure

Question 38

4 external reasons for business failure:

Answer 38

1. a fundamental change in technology which gives a rival/ new entrant a competitive advantage that is too great to be matched. 2. the arrival of a competitor who is so effective at acquiring and keeping customers that others fall by the wayside 3. economic change 4. the behaviour of banks

Question 39

3 reasons of financial business failure:

Answer 39

1. the business may have been running below breakeven for some period of time. the lossmaking drains the business of its cash, as cash outflows regularly exceeds cash inflows 2. a cash flow crisis 3. overtrading

Question 40

definition of administration:

Answer 40

when the directors of a business feel forced by the threat of insolvency to hand over management control to an administrator, who may try to sell the business or close it down and sell off the assets

Question 41

Definition of business model:

Answer 41

an underlying plan of how the business is going to make a profit in the long term

Question 42

give 4 examples as to why a business cannot pay back debt:

Answer 42

1. employees on strike 2. business has gone bust 3. increased costs (from suppliers) 4. a breakeven issue 5. customer sales have gone down 6. delayed payment from debtors

Question 43

how can a business increase profit, by increasing the revenue? (3)

Answer 43

1. advertising 2. put the price up (sppu) 3. specialise the product - unique selling point 4. innovate/ rebrand 5. expand product range

Question 44

how can a business increase profit, by decreasing costs? (3)

Answer 44

1. lower material costs 2. change supplier 3. change location 4. change organisational structure 5. change organisational structure (make it flatter - delayer) 6. economies of scale (bulk buy)