AQA GCSE Business (8132) · Spec 3.6.1, 3.6.2, 3.6.3 and 3.6.4
3.6 Finance
Read the notes, then try the questions. Each one is marked the moment you press Check, and shows the right answer and why.
Key ideas
- Match the finance to the need. An overdraft covers a short dip in the bank balance. A bank loan suits a big purchase repaid over years. A share issue raises large sums but shares ownership. Trade credit delays payment to suppliers.
- Retained profit is profit the business has earned and kept. It is not borrowed.
- Fixed costs do not change with output, such as rent. Variable costs rise with output, such as ingredients.
- Profit = revenue minus total costs. Gross profit = revenue minus cost of sales.
- Contribution per unit = selling price minus variable cost per unit. Break-even output = fixed costs divided by contribution per unit.
- Margin of safety = actual sales minus break-even output.
- A cash flow forecast predicts cash in and out so shortfalls can be planned for. A profitable business can still run out of cash.
- Gross profit margin = gross profit divided by revenue x 100. Net profit margin = net profit divided by revenue x 100. Margins let you compare performance over time or with rivals.
- Average rate of return (ARR) compares the average yearly profit from an investment with its cost, to see if it is worthwhile.
Key terms
- Revenue
- Money from selling goods or services.
- Fixed costs
- Costs that do not change with output.
- Variable costs
- Costs that rise as output rises.
- Contribution
- Selling price minus variable cost per unit.
- Break-even point
- The output where total revenue equals total costs.
- Margin of safety
- How far actual sales are above the break-even point.
- Gross profit
- Revenue minus cost of sales.
- Net profit
- Gross profit minus other expenses and overheads.
Common mistakes
- Using the wrong source of finance for the need, such as a share issue to cover a two-week shortfall.
- Thinking profit and cash are the same. A business can be profitable and still run out of cash.
- Dividing fixed costs by the selling price in the break-even formula. Divide by the contribution per unit instead.
Exam tip
For a 'Calculate' question, write the formula and each step. Marks are given for method, so clear working protects your marks if you slip on the arithmetic. Include units such as pounds or units sold, and check the answer is sensible.
Free practice questions
7 questions, 15 marks. Answer, then press Check. The marking guide explains how the marks are worked out. Nothing is saved.
- Question 1 · Matching[4 marks]
Match each term to its definition.
- Question 2 · Matching[4 marks]
Match each situation to the most suitable source of finance.
- Question 3 · Multiple choice[1 mark]
A product sells for £15 with variable costs of £9 per unit. What is the contribution per unit?
- Question 4 · Multiple choice[1 mark]
Which of the following correctly defines gross profit?
- Question 5 · Multiple choice[1 mark]
What does the 'margin of safety' show on a break-even chart?
- Question 6 · Matching[3 marks]
Match each break-even term to its correct meaning.
- Question 7 · True or false[1 mark]
State whether this statement is True or False.