2.2.1 Accounting Flashcards
Define sales volume
The quantity of output sold in a given time period
Sales revenue (total revenue)
The value of output sold by a business. Is calculated by price x quantity of output
Short run cost
Where at least one factor of production is fixed and other costs are variable
Long run
All cost factors can vary including fixed, e.g a landlord changing rent prices after a while.
Fixed cost
These are costs which stay the same regardless of a change in level of output or sales
Variable cost
Costs that change directly with the level of output or the sales.
Total costs
The addition of fixed cost and variable costs. Calculated by variable cost + fixed cost
Average cost/unit cost
Cost of unit per production. Calculated by total cost/output
Profit
When the difference between revenue and total cost are positive . Profit = tr-tc
Loss
When the difference between total revenue and total costs are negative. Calculated by tr- tc
What’s the difference between sales vol and sales rev?
Sales revenue is the value of the output whereas sales vol is the quantity of output.
What are the two ways profit can be calculated ?
Tr-Tc
Margin of safety x contribution per unit
Define contribution
The difference between selling price and total variable cost. Calculated by selling price- variable cost
Define total contribution
When more than one unit is sold the total contribution can be calculated. Calculated by either, TR-TVC
Or unit contribution x quantity of units sold
In terms of contribution what is the third calculation for profit?
total contribution - fixed costs
Margin of safety
The range of output between the break even and the current level of output, over which a profit is made. Calculated by the current output level-break even point
Break even definition
When a business generates just enough revenue to cover its total cost
The limitations of cash-flow forecasts
- some figures will be based on estimates
- variables are constantly changing and cash flow forecasts should be updated for them to be valid
- cff focus on one variable-cash. They do not consider other important variables, such as profitability or productivity
The benefits of cash-flow forecasting
- to support an application for lending (perhaps as part of a business plan)
- to support the budgeting process
- to identify any potential cash flow crisis
How to speed up cash inflows
- incentivise early repayment by giving customers a discount for paying early
- reduce trade credit given to customers
- Sell of stock at a discounted price to free up cash
- inject fresh capital into the business
How could a business avoid bad cash flow
- a business should always plan to keep a minimum cash reserve in its bank account
How to slow down cash flows
- delay repayments to suppliers
- increase trade credit agreements with suppliers
- cut costs, such as finding cheaper alternatives in areas such as training or advertising
What’s the best way to make sure a business has a positive cash-flow
Invest time and effort into planning effective cash flow forecasts by research etc
The causes of cash flow problems include:
- ovetrading
- allowing too much trade credit to customers
- poor credit control
- inaccurate cash-flow management
- unforeseen costs
Strengths of break even analysis
- focuses entrepreneur on how long it will take before the business is profitable
- MOS can show how much sales forecasts can prove over optimistic before loses incurred
- help entrepreneur understand the level of risk involved in a start up
- illustrates importance of minimising fixed costs
- calls quick and east- good for quick estimates
Limitations of be analysis
- unrealistic assumptions
- sales unlikely to be the same as output
- variable cost don’t stay the same
- most business sell more than one product-harder to calc be
- be should be seen as panning rather than a decision tool
Budget definition
A budget is a financial plan for the future. An effective budget should drive many of the decisions taken across the functional areas of a business.
What is the purpose of budgeting
To ensure efficiency in spending. Setting budgets allow
Consumer trends
The habits and behaviours of people who purchase goods and services. They can include how people who purchase goods or services
What’s the difference with a cash flow forecasts and a sales forecasts
A cash flow forecasts predicts the movement of cash in and out of a business whereas a sales forecasts only predicts the sales volume the business could generate. A cash flow forecasts can be used to encourage investment in a business but a sales forecast will allow the business to plan the amount of staff needed etc.
Limitations of sales forecasting
- fluctuations in economic variables
- the data used could be inaccurate which would lead to a inaccurate sales forecasts
- volatile markets- some markets are more unpredictable than others
- subjective to expert opinion
- volatile consumers - human behaviour is often unpredictable
What is the relationship between revenue , contribution and profit?
When revenue is generated into the business, its variable costs are deducted to give the contribution , this is then what covers the fixed costs and then remainder of revenue left is now your profits
Why does contribution differ to profit?
This is because after paying off all variable costs, the contribution will then cover its fixed costs
What is made at the break-even point? Profit or loss
Neither
What does the break even chart show? (8)
-the value of revenue over the level of output
The amount of profit made after break even
The amount of revenue needed to cover the costs
The relationship between fixed costs and variable costs as output rises
The profit at a particular level of output
The level of fixed costs
What does a high margin of safety suggest ?
This suggests that the business would be able to make a profit even if they had slight a decrease in the sales revenue
What does a small margin of safety suggests?
This suggests that if the business was to undergo a slight decrease in their sales revenue the business would potentially undergo a loss, they are therefore at higher risk of it
Outline the uses of break even ananlysis
To asses whether a business idea is profitable and viable
To assess the level of production
To aid with the pricing of products in comparison to total costs
To asses how much output must be sold in order to make a profit
How could banks use break even analysis?
In order to issue bank loans, the bank would want to now that the business has the financial stability to cover this, due to this also being found in a business plan
What would a decrease in variable costs result in concerning BE
Lowering it
Benefits of break even analysis
- use to impart variances (e.g on pricing/costs etc)
- simple and easy
- useful guideline for decisions
Output and stocks concerning limitations of break-even
Assumes that all output is sold, so output equals sales
Not the case most of the time
Stocks can be held in they are finished goods to cope with the changes in the demand
Also times when firms can’t sell products and decide to stockpile in order to not lay off staff
List the factors that affect sales forecasting
- actions of competitors
- economic variables
- consumer trends
How do consumer trends affect sales forecasts
- seasonal variations : sales fluctuate dependent on the season and the business goods and services
- fashion : esp in the clothing industry , consumers may change their minds on what is considered fashionable
- long term variables : when consumer behaviours change over a longer period of time , could be due to ethical reasons for example
How can economic variables affect sales forecasts ?
- economic growth : the of the economy will depend on the total sals made in the economy, e.g in a recession less sales are likely to be made
- interest rates: if the cost of borrowing is increased, this will lead to more reward to spending than saving , meaning more consumers will be purchasing in the economy, thus increasing sales
- inflation: if the value of money decreases then sales are likely to decrease
- unemployment : if the level of unemployment increases, the amount of disposable income will relatively decrease
- exchange rates: if the cost for purchasing is increased , consumers likely to purchase in their countries plus international trade will increase, leading to increased sales
How can actions of competitor affect sales forecasts?
If the competitors change their prices for example this can have a ripple effect an alter the demand for goods for the business itself
Why is sales forecasting important?
This is because the business ability to predict this will reduce uncertainty and increase ability to plan more effectively
What approaches may a business use to accurately carry out a sales forecasts?
- market research
- time series analysis
What is time series analysis
Predicting future sales based on past sales figures, taking into account the trend and seasonal fluctuations
