1.6 Flashcards
what is sales revenue/turnover?
the amount of money coming into the firm from selling the product or service
how do you calculate sales revenue/turnover?
price per unit x quantity sold
what is sales volume?
total physical number of products sold
what are average costs?
how much it costs to make one unit
how do you calculate average costs?
total cost / output
what are fixed costs?
costs which stay the same at all levels of output in the short run eg rent, salaries, insurance
what are variable costs?
costs of production which increase directly as output rises eg raw materials, comission
how do you calculate variable costs?
variable costs per unit x units sold
how do you calculate total costs?
total fixed costs + total variable costs
what is percentage change?
the measure of an increase or decrease in value
how do you calculate percentage increase
decreases
change?
x1 + (%change as a decimal)
x1 - (% change as a decimal)
(change/original) x100
what are semi-variable costs?
costs that are both fixed and variable eg phone bill and overtime wages
what do fixed costs usually relate to?
time
what do variable costs usually relate to?
units
when is there Break even?
total costs=total revenue
what is BEO?
the number of items that need to be sold to reach BEP
how do you calculate BEP?
fc / (sp - vc)
what does money generated in a firm contribute to?
1st = VC
2nd = FC
3rd profit
how do you calculate contribution?
sp-vc
what are the 2 ways of calculating total contribution?
total sales revenue - TVC
or
cont x total units
what is contribution?
profit/loss after BE
what is MOS?
how much AO is above BEO
how do you calculate MOS?
AO - BEO
what are the 2 ways of calculating profit?
MOS x cont
or
TR - TC
what are variables that might change?
fixed costs
variable costs
selling price
what fixed cost variables might change?
landlords put up rent
bank changes interest rates
management want pay increase
what variable cost variables might change?
raw materials change in price
minimum wage increases
utility companies change price
what selling price variables might change?
new competition enters the market
positive word of mouth increases demand
what are the 3 positives of Break Even?
shows profit and loss at different levels
aids decision making and provides a target
can predict the outcome of changing variables
what are the 3 negatives of BE?
based on predicted costs and revenues
fixed costs can vary in the long run
it doesn’t ensure sales will actually happen
What is market exit?
the moving away of resources from unprofitable industries or giving them a change of use
what is market entry?
where resources move into attractive and profitable industries
what causes market exit?
falling demand and low prices meaning falling profit and revenue meaning resources exit industry
what causes market entry?
rising demand and high prices meaning rising profit and revenue meaning resources attracted
what are barriers to entry?
obstacles deterring new entrants eg high investment, start up costs and legal barriers
why does profit stay high in some industries?
because barriers to entry protect existing firms and give them more power
what is a statement of comprehensive income (profit and loss account)?
a record of how much profit or loss a firm has made during a year
how do you calculate gross profit?
sales revenue (sp x quantity) - COS
how do you calculate operating profit?
gross profit - overheads
how do you calculate net profit?
operating profit - tax and interest
how do you calculate GPM?
GP / revenue x 100
what does it mean if GPM is low and falling?
COS may not be effectively managed or sales are in decline
how do you calculate OPM?
OP / revenue x 100
what does it mean if OPM is low and falling?
expenses may not be effectively managed or sales are in decline
how do you calculate NPM?
NP / revenue x 100
what does it mean if NPM is low and falling?
GP or OP is in decline or interest/tax rates have changed
how can profits be improved?
reducing COS
reducing overheads
increasing prices
increase advertising
decreasing prices
how can COS be reduced?
changing supplier, decreasing labour costs, making employees more efficient
how can overheads be reduced?
cheaper premises or energy supplier, reducing salaries
how can prices increase?
if the market is growing and inelastic
how can prices decrease?
if the product is elastic
what is a cash flow forecast?
a table showing the expected flow of money in and out of the firm calculated on a monthly basis
how do you calculate opening balance?
closing from previous month
how do you calculate NCF?
total inflows - total outflows
how do you calculate closing balance?
opening balance + NCF
how is a cash flow forecast useful for decision making?
helps identify shortages and surplus of cash
helps to plan or the future
can be accurate in the short term
how is a cash flow not useful for decision making?
figures are only estimates
it needs updating regularly
new competitors may take away sales
how is negative cash flow a problem?
extra money is needed to overcome the shortage, money owed may have to be delayed and the firm may be unable to buy stock
how is negative cash flow not a problem?
it may only be temporary
what are the 5 uses of cash flow forecasts?
identifying potential shortfalls
identifying possible corrective action
to help secure finance
to give confidence about survival
to provide a guide against which to measure actual cash flow
what are the 3 factors that can affect cash flow?
timings
transaction types
nature of business
give examples of timings
seasonal sales and timings in and out
give examples of transaction types
sales and purchases (credit and cash)
give examples of nature of businesses
start-up capital and costs
what are the 4 cash flow problems?
firms need enough cash to meet working capital
not enough liquid cash funds may mean not being able to meet short term debts
limited cash may result in missed opportunities
a firm may survive short term cash flow problems however long term cash flow problems can be insurmountable
how can cash flow be improved (5)?
increasing the volume of the inflow of cash
speeding up the timing of the inflow of cash
reducing the volume of the outflow of cash
slowing down the timing of the outflow of cash
get an overdraft
