Business > B2.4 > Flashcards

B2.4 Flashcards

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1
Q

What is profit?

A

Profit is the reward for the risk that entrepreneurs take in providing a product or service. It is calculated after costs are deducted from sales revenue.

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2
Q

What are the two main types of profit?

A

The two main types are gross profit and net profit. Gross profit considers only direct costs of production

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3
Q

How do you calculate gross profit?

A

Gross profit = Sales revenue − Cost of sales.

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4
Q

How do you calculate net profit?

A

Net profit = Gross profit − (Operating expenses + Interest).

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5
Q

What is a profit margin?

A

A profit margin shows how much of sales revenue is converted into profit. It can be calculated for gross

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6
Q

Why are higher profit margins preferable?

A

Higher profit margins mean more revenue is being converted into profit

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7
Q

How do you calculate gross profit margin?

A

Gross profit margin (%) = (Gross profit ÷ Sales revenue) × 100. It shows the proportion of revenue left after paying the cost of sales.

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8
Q

How do you calculate net profit margin?

A

Net profit margin (%) = (Net profit ÷ Sales revenue) × 100. It shows the proportion of revenue left after all costs are paid.

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9
Q

What does a high gross profit margin indicate?

A

It indicates the business adds significant value to its products or services. Example: luxury brands.

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10
Q

What does a low net profit margin indicate?

A

It indicates high costs or a competitive market

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11
Q

What is the Average Rate of Return (ARR)?

A

ARR measures the expected return on a proposed capital investment as a percentage. It helps compare projects to decide which will generate the most profit.

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12
Q

How is ARR calculated?

A

ARR (%) = (Average annual profit ÷ Initial investment outlay) × 100. Average annual profit = Total profit ÷ Number of years.

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13
Q

Advantages of ARR?

A

Considers all net cash flows

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14
Q

Disadvantages of ARR?

A

Ignores timing of cash flows and opportunity cost of investment.

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15
Q

How do you calculate sales revenue?

A

Sales revenue = Price × Quantity sold.

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16
Q

What is sales volume?

A

Sales volume is the number of units sold

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17
Q

What is market share?

A

Market share is the proportion of total sales revenue of a product/service a business has in a market. Market Share (%) = (Sales revenue of business ÷ Total market sales revenue) × 100.

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18
Q

How do you calculate contribution of a single product to total sales?

A

Percentage contribution = (Sales revenue of product X ÷ Total sales revenue of all products) × 100.

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19
Q

What is quantitative data?

A

Quantitative data is numerical

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20
Q

What are sources of quantitative data?

A

Primary data collected firsthand and secondary data collected by others. Sources include financial data

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21
Q

How does a bar chart help?

A

Bar charts visually show sales or other data over time

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22
Q

How does a pie chart help?

A

Pie charts show how different categories contribute to total sales or data

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23
Q

How does a scatter graph help?

A

Scatter graphs show relationships between two variables

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24
Q

What is financial data?

A

Financial data includes sales revenue

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25
Why is marketing data important?
Marketing data
26
What is market data?
Market data includes demographics
27
How can businesses use financial data?
To identify trends
28
What are limitations of financial data?
Data may be interpreted differently
29
Give an example of different interpretations of data.
A sharp sales increase may seem impressive alone but less so when compared to competitors.
30
What is window dressing?
Presenting financial data positively to create a better impression
31
Why can financial data become out-of-date?
Sales
32
Why are qualitative factors a limitation?
Ethical or social responsibility achievements are hard to quantify but are important for business performance and decision-making.
33
What is profit?
Profit is the financial reward for taking business risks when providing goods or services.
34
What are the two main types of profit?
Gross profit and net profit.
35
Formula for gross profit
Gross Profit = Sales Revenue − Cost of Sales. Shows profit after production costs but before other expenses.
36
Formula for net profit
Net Profit = Gross Profit − (Operating Expenses + Interest). Shows profit after all costs, including overheads and interest.
37
What is a profit margin?
A profit margin is the percentage of sales revenue that becomes profit, showing efficiency in converting revenue to profit.
38
Formula for gross profit margin
Gross Profit Margin (%) = (Gross Profit ÷ Sales Revenue) × 100. Indicates value added by business after production costs.
39
Formula for net profit margin
Net Profit Margin (%) = (Net Profit ÷ Sales Revenue) × 100. Indicates proportion of revenue left after all costs.
40
Why compare profit margins over time?
To assess business performance trends and efficiency in converting revenue to profit; increasing margins indicate improvement.
41
What is the Average Rate of Return (ARR)?
ARR measures the annual return on a capital investment project as a percentage of initial outlay. Used to compare potential projects.
42
Formula for ARR
ARR (%) = (Average Annual Profit ÷ Initial Investment) × 100
43
Advantages of ARR
Considers all cash flows, easy to understand, allows comparison between projects.
44
Disadvantages of ARR
Ignores timing of cash flows, ignores opportunity cost, does not account for risk.
45
What is sales revenue?
Sales revenue is the total income from selling goods or services: Revenue = Price × Quantity Sold.
46
What is sales volume?
Sales volume is the number of units sold, a physical measure of output.
47
What is market share?
Market share (%) = (Sales Revenue of Business ÷ Total Market Sales Revenue) × 100. Shows the proportion of market controlled by the business.
48
How to calculate contribution of each product to revenue
(Sales Revenue of Product ÷ Total Sales Revenue of All Products) × 100.
49
What is quantitative data?
Numeric or statistical data used to support business decisions; must be accurate and interpreted correctly.
50
Primary vs Secondary data
Primary: collected first-hand for specific purpose; Secondary: collected by someone else and reused.
51
Examples of quantitative data
Graphs, charts, financial data, marketing data, tables, infographics.
52
Benefits of bar charts
Visually compares sales over time, easy to identify trends.
53
Benefits of pie charts
Shows proportion of sales by category or product.
54
What is a scatter graph used for?
To identify relationships between two variables and show positive or negative correlations.
55
Define positive correlation
Increase in one variable leads to an increase in another (upward trend).
56
Define negative correlation
Increase in one variable leads to a decrease in another (downward trend).
57
Strong vs weak correlation
Strong correlation: line of best fit easy to draw. Weak correlation: difficult to identify trend.
58
What financial data can support decisions?
Sales revenue, profit, costs, tax, interest rates, asset valuations, bank balances.
59
Sources of marketing data
Surveys, focus groups, observation, feedback, footfall, government publications, media.
60
Uses of market data
Demographics, market size, competitor share, growth rate, average prices, investment trends; helps identify opportunities and threats.
61
Limitations of financial data
Data may be interpreted differently, can be manipulated (window dressing), becomes quickly outdated, ignores qualitative factors.
62
Example of interpretation limitation
Sales may have increased but competitor growth is higher, making the performance less impressive.
63
Example of qualitative limitation
Business focuses on ethical practices, which cannot be measured in financial data but affect success.
64
Front
Back
65
Define revenue.
1 mark: Total income a business earns from selling goods or services.
66
Calculate revenue.
2 marks: Revenue = Price × Quantity sold. E.g., 100 units × £10 = £1,000.
67
Define cost of sales.
1 mark: The direct costs of producing or buying the goods sold by a business.
68
Define gross profit.
1 mark: Revenue minus cost of sales.
69
Calculate gross profit.
2 marks: Gross profit = Revenue – Cost of sales. E.g., £1,000 – £600 = £400.
70
Explain why gross profit matters.
3–4 marks: Shows profit from trading before other expenses. High gross profit indicates effective production or purchasing.
71
Define net profit.
1 mark: Gross profit minus all operating expenses including rent, wages, and interest.
72
Calculate net profit.
2 marks: Net profit = Gross profit – Expenses. E.g., £400 – £150 = £250.
73
Explain why net profit matters.
3–4 marks: Shows overall profitability. Businesses with higher net profit can reinvest, survive downturns, and satisfy stakeholders.
74
Gross profit margin formula.
1 mark: (Gross profit ÷ Revenue) × 100.
75
Explain what gross profit margin shows.
2–3 marks: Measures efficiency of core trading activities. Higher margin means better cost control or higher selling prices.
76
Calculate gross profit margin.
3–4 marks: Gross profit £400, revenue £1,000 → 400 ÷ 1000 ×100 = 40%. Shows that £0.40 from each £1 of sales is gross profit.
77
Net profit margin formula.
1 mark: (Net profit ÷ Revenue) × 100.
78
Explain what net profit margin shows.
2–3 marks: Overall profitability after expenses. High margin indicates effective management of costs.
79
Define break-even.
1 mark: Level of output where total revenue equals total costs and profit is zero.
80
Calculate break-even.
2 marks: Break-even = Fixed costs ÷ Contribution per unit. E.g., Fixed costs £50,000, contribution £5 → 10,000 units.
81
Explain margin of safety.
2–3 marks: Difference between actual sales and break-even sales. Indicates risk level of not making a profit.
82
Define cash flow.
1 mark: Movement of money into and out of a business.
83
Explain why cash flow is important.
2–3 marks: Ensures the business can pay bills, wages, suppliers, and avoid insolvency.
84
Calculate net cash flow.
2 marks: Net cash flow = Inflows – Outflows. E.g., £5,000 – £4,000 = £1,000.
85
Calculate closing balance.
2 marks: Closing balance = Opening balance + Net cash flow. E.g., £2,000 + £1,000 = £3,000.
86
Explain why cash flow forecasts are useful.
3–4 marks: Allows planning for shortages or surpluses. Helps prevent late payments and supports investment decisions.
87
Define average unit cost.
1 mark: Total cost ÷ number of units produced.
88
Calculate average unit cost.
2 marks: Total cost £500, output 100 units → £500 ÷ 100 = £5 per unit.
89
Explain why average unit costs are important.
3–4 marks: Lower unit costs improve competitiveness and profitability. Business may decide to invest in productivity improvements to reduce costs.
90
Define qualitative data in finance.
1 mark: Non-numerical information such as customer opinions or feedback.
91
Explain how qualitative and quantitative data support decisions.
3–4 marks: Quantitative data shows trends and performance; qualitative data explains reasons behind the numbers, helping managers make informed decisions.
92
Evaluate using financial ratios for decisions.
4–6 marks: Ratios like GPM and NPM allow comparison over time or with competitors. However, they may not account for seasonal variation, context, or non-financial factors such as employee morale. Recommendations should combine ratio analysis with other qualitative information.
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