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OCR GCSE (9-1) Business (J204) · Spec 5.1, 5.2, 5.3, 5.4 and 5.5

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

  • The finance function gives information that supports decisions, keeps the records, and can limit what other functions spend.
  • Sources of finance can be internal, such as the owner's savings and retained profit, or external, such as a bank loan or overdraft.
  • Revenue = selling price × quantity sold. Total costs = fixed costs + variable costs. Profit = revenue − total costs.
  • Gross profit = revenue − cost of sales. Net profit = gross profit − expenses.
  • Gross profit margin = gross profit ÷ revenue × 100. Net profit margin = net profit ÷ revenue × 100.
  • Break-even output = fixed costs ÷ (selling price − variable cost per unit).
  • Cash flow = cash in minus cash out. Closing balance = opening balance + receipts − payments, and it becomes the next month's opening balance. A firm can make a profit and still run out of cash.
  • Sources of finance also include owners' capital, a new partner, a share issue, crowdfunding, trade credit and sale of assets. Businesses need finance to start up, to expand and to run day to day.
  • Average rate of return (ARR) = average yearly profit divided by the cost of the investment x 100.
  • A cash-flow forecast is a planning tool. It shows when cash may run short, so the business can fix the problem in time.

Key terms

Gross profit
Revenue minus the cost of sales.
Net profit
Gross profit minus expenses.
Profit margin
Profit as a percentage of revenue.
Break-even
The level of sales where total revenue equals total costs.
Cash flow
The money moving into and out of a business.
Closing balance
The cash left at the end of a period: opening balance plus receipts minus payments.
Average rate of return (ARR)
Average yearly profit from an investment as a percentage of its cost.

Common mistakes

  • Mixing up gross and net profit. Net profit is after expenses are taken off.
  • Giving a profit margin in pounds. A margin is a percentage of revenue.
  • Dividing fixed costs by the price alone when finding break-even. You divide by price minus variable cost.
  • Forgetting the opening balance when finding a closing balance.
  • Mixing up cash and profit. A credit sale is recorded as revenue straight away, but no cash arrives until the customer pays.
  • Leaving out units, or giving a formula with no answer. A formula on its own scores 0.

Exam tip

Calculations are worth 2 or 3 marks, with one mark per step, so show your working. You can get full marks without working if the answer is right. Check units such as £ and %. In the 9-mark Evaluate, use your own calculation from the data in the text, then make a decision and justify it.

Free practice questions

6 questions, 9 marks. Answer, then press Check. The marking guide explains how the marks are worked out. Nothing is saved.

  1. Question 1 · True or false[4 marks]

    Are these statements about the finance function true or false?

    1. It provides financial information to help managers make decisions.

    2. Only very large businesses have a finance function.

    3. It can limit the money other functions are allowed to spend.

    4. Its main job is to design products.

  2. Question 2 · Multiple choice[1 mark]

    A business has a gross profit margin of 35%. This means that:

  3. Question 3 · Multiple choice[1 mark]

    A shop has revenue of £80,000 and cost of sales of £52,000. Its gross profit margin is:

  4. Question 4 · Multiple choice[1 mark]

    A firm has revenue of £250,000, total costs of £220,000 and net profit of £30,000. Its net profit margin is:

  5. Question 5 · Multiple choice[1 mark]

    Fixed costs are £12,000. The selling price is £8 and the variable cost is £3 per unit. The break-even quantity is:

  6. Question 6 · Multiple choice[1 mark]

    A cash flow forecast shows an opening balance of £3,200, receipts of £9,400 and payments of £11,000. The closing balance is: