2.5 Flashcards
what is the margin of safety
difference between actual sales and break even point
what are fixed costs
costs that do not vary with the level of output or sales
what are variable costs
costs that change based on how much a company produces and sells
what is the equation for gross profit
sales revenue - cost of sales
equation for gross profit margin
(gross profit/sales revenue) X100
what is operating profit
gross profit - expenses
what is operating profit margin
(operating profit/sales revenue) X100
equation for net profit
operating profit - interest
equation for net profit margin
(net profit/sales revenue) X100
disadvantages of cash flow forecasting
overinflate
business is dynamic
human error
cannot take into account unexpected factors
state 3 ways to fix cash flow forecast issues
short term loan
reduce expenses
delay paying bills
factors influencing cash flow
customer trends - increase in decrease in sales
economic variables - growth or decline in economy
competitors actions - innovation, new products, reputation gain
give examples of cash inflow and outflow
cash inflow: owners capita;
investors
loan
grant
sales revenue
cash outflow: loan repayment
rent
stock costs
wages
advertising
expansion
what is cash flow forecast
predicts the amount of money that will flow into and out of the business
why does a business need a business plan
gain certain forms of finance
reduce risk
map out route to a business objectives
attract investors
define retained profit
profits which are reinvested into the business to help it grow
how do you calculate contribution
selling price - variable costs (per unit)
how do you calculate break even
fixed costs/contribuation
what are the limitations of break even analysis
doesn’t take into account external factors
time consuming
assumes every item produced is sold
some businesses fixed costs are shared across a portfolio of products
what is a budget
financial plan and an agreed spending limit within a business based on objectives
what is historical figures budget + one pro one con
budget set based on current financial figures
+/ realistic
-/business is dynamic
what is zero based budget + one pro & one con
based on potential performance
+/ justifies expenses
-/ takes a long time
2 advantages & 2 disadvantages of budgets
+/ allocated resources
promotes forward thinking
-/ requires lots of planning
may cause conflict
what is favorable variance
manager has underspent or sold more than expected
what is adverse variance
manager has overspent or sold less than expected
what is profit
profit is recorded straight away
total revenue - total costs
what is cash
not recorded until its paid out, it is immediately available to the business
define liquidity
ability of a business to turn assets into cash
what is a balance sheet
shows a business assets balanced by the sources of finance that have funded them
what are non-current assets (give examples)
long term assets not expected to be sold within a year
e.g. equipment
taxes
what are current assets (give examples)
short term assets which are likely to be turned into cash within the next year
e.g. raw materials
trade debtors
what are non-current liabilities (give examples)
debts which are not expected to be paid off in the next year
e.g. long term loans
pensions
what are current liabilities (give examples)
debts which are expected to be paid within the next year
e.g. short term loans
corporation tax
what are the uses and limitations of balance sheets
+/ investors can see a businesses assets
summarises valuations of a business
-/ its a snap shot, doesn’t show how a business is doing over time
uses figures not margins
intangibles are hard to put value on
what does liquidity tell you about a business
indicates to an investor the ability of a business to pay its debts
measured by calculating current ration & acid test ratio
how do you calculate the current ratio
current assets/
current liabilities
what does the current ratio tell you
estimates whether the business can pay debts due within one year out of the current assets
how do you calculate the acid ratio test
current assets - stock/
current liabilities
how can you improve liquidity
reduce the amount of stock that a business holds
reduce credit period offered to customers
pay suppliers later
increase borrowing long term & clear short term debt
how do you calculate working capital
current assets -
current liabilities
low value indicates issues paying expenses
state 4 financial reasons reasons why businesses fail
poor cash flow management
lack of funds to pay tax bill
lack of capital which leads to excessive borrowing
borrowing from expensive sources
give some non-financial reasons why businesses fail
failure to innovate
poor marketing
strong pound
competition
civil unrest
government policies
natural disasters
