7.3 Financial Information & Business Performance Flashcards
All 13 cards in this deck
What does gross profit margin show a business?
How much gross profit is made for every £1 of sales revenue. A higher margin means more of each sale is left after paying the cost of sales.
Why must one set of financial data be compared with something else before a decision is made?
On its own it is meaningless — it needs context from historical data for the same business or from similar businesses.
Give one limitation of using financial information to judge business performance.
Any one of: it is historical, so it may be out of date; businesses use different accounting periods and policies, so comparison is difficult; the same data can be interpreted in different ways.
Name three types of financial information a business can use to judge its performance.
Cash-flow forecasts, break-even, and profitability measures (gross and net profit margins, average rate of return).
Which financial measures are used to judge how profitable a business is?
Gross and net profit margins, and average rate of return (ARR).
Give two ways a business could improve its net profit margin.
Reduce its expenses (e.g. cheaper suppliers or fewer staff), or increase revenue without raising costs as much.
Why do banks and other lenders use a business's financial information?
To judge how safe it is to lend money to the business.
Why do employees use a business's financial information?
To see whether their jobs are secure, and to negotiate higher wages if the business is profitable.
Why do suppliers use a business's financial information?
To make sure they will get paid and that the business will continue as a customer.
Why are customers interested in a business's financial information?
To check they are getting a fair price and that the business will not go out of business.
Why do managers use financial information?
To make decisions about the future direction of the business, e.g. expansion or launching a new product.
True or false? Financial information is the only thing a business needs when judging its performance.
False. Non-financial factors such as competition, shareholder views and working practices may be just as important.
True or false? External factors such as consumer income and unemployment levels can affect how financial data should be interpreted.
True. A fall in profit may be caused by outside conditions rather than poor management.