2.2 - Financial Planning Flashcards
Define start up costs
The money a business owner has to spend before it can start trading
Define running costs
The money spent on the businesses day to day activities
Define fixed costs
Do not change when output varies, have to be paid even if nothing is made/sold by a business.
Examples of fixed costs:
- rent
- insurance
- loans
- salaries
- wages
- advertisement
Variable costs
Are costs which increase directly with output
Examples of variable costs
- raw materials
- stock
- packaging
- piece rate pay
Total costs=
Fixed costs + Variable costs
Define revenue
The amount of money a business receives from selling its goods and services, the money that comes in from sales
Total revenue=
Volume sold X Average selling price
Define Profit
The amount of money left over when a business subtracts its costs from its revenue (profit = total revenue - total costs)
Profit allows businesses to:
- survive in the long term
- generates wealth for the owners
- a reward for taking risks
Ways to increase revenue
Increase revenue - to do this you need to increase quantity sold, and achieve a higher selling price
Lower the costs - to do this you need to use cheaper materials, reduce labour costs, reduce overall spending
Define contribution per unit
The amount of the sale for each product contributed towards paying off the fixed costs of a business.
Contribution per unit=
Selling price - variable costs per unit
Total contribution =
Contribution per unit X number of units sold
Total sales revenue - total variable costs
Profit =
Total contribution - fixed costs
What is break even analysis
It looks at how costs, revenue and profit change at different levels of output
Break even point…
Is the level of output at which firms total costs and revenue are equal, so that no profit is made
Any output greater than the break even point..
The firm will make a profit
Any output less then the break even point..
The firm will make a loss
Break even level of output =
fixed costs ➗ contribution per unit
What is the margin of safety ?
The difference between the planned level of output and the break even level of output
Fall in fixed costs…
Shifts total costs down, meaning break even is reduced
Fall in variable costs…
Reduces the gradient of the total costs line, hence the break even is reduced
