Please answer the questions below 1 Discuss the differences

Please answer the questions below:

1. Discuss the differences between efficiency and effectiveness.

2. Why is it important for small business owners to understand the difference between profit and profitability?

3. What financial ratio is used to determine profitability?

4. Discuss the differences between operating and financial leverage.

5. Distinguish between gross working capital and net working capital.

6. Discuss the role that marketable securities play in current asset management.

7. Explain the problems that a firm may encounter when it does not provide for accrued liabilities.

Solution

1) Effectiveness is about focussing on the items of importance and working on items which contributes to the development of the organization. Efficiency is all about optimizing the input and getting the best output possible out of the limited input resources.

2) Profitability is basically the inherent strength of the business model and expresses how much the potential of the business is to generate cash flows. While profit is more of an accounting metric which provides the book profit made by a firm.

3) The net operating margin can be used to find out profitability of the business operations.

4) Operating leverage denotes how much profit changes by increase or decrease in sales. The higher the fixed costs, higher the operating leverage.

Financial leverage is expressed by ratio of debt and equity on a firm’s balancesheet. If the firm is highly levered, then it has higher financial leverage.

5) Gross working capital is measured by total current assets while if we subtract the current liabilities, it gives us the net working capital.

6) Marketable securities helps in deploying free cash and earns interest for the firm. Through this the firm can manage current assets and also earn additional income.

7) There could be possibility of large loss in the future and the current income statements does not reflect the true picture of the financial state of the firm.