(2.5 in Booklets) Managing Finance 2.3

Question 1

The Break even Point is…

Answer 1

Where you only cover your costs
When your revenue equals total costs

Question 2

Revenue

Answer 2

Selling Price x units sold
Money into the business through sales

Question 3

Fixed Costs

Answer 3

Costs that do NOT vary with the level of output or sales e.g. stall rental

Question 4

Variable Costs

Answer 4

Costs that DO change with the level of output or sales

Question 5

Contribution

Answer 5

Selling price - Variable costs

Question 6

Break Even

Answer 6

BE = Fixed Costs/ Contribution

Question 7

Margin of Safety

Answer 7

Difference between the actual level of output and the breakeven

Question 8

Limitations of a Break Even Point

Answer 8

Doesn’t account for external factors
You have to calculate it first
Makes assumptions
Prices may differ for services e.g. solicitor
Fixed costs may increase
Large product portfolios- prices differ and sales too

Question 9

Budgets

Answer 9

Based on the objective of the business or organisation
Means managers must think ahead
Usually 12 months so that it fits the accounting period of a year

Question 10

Why would businesses use a budget?

Answer 10

Planning, motivation, decisions, control

Question 11

2 Types of Budget: Historical Figures Budget

Answer 11

Uses current financial figures
Realistic based on past performance
Cut costs
But people will waste some budget in order to spend it all

Question 12

2 Types of Budget: Zero Based Budget

Answer 12

Set from potential performance
No past performance considered
Used by start up with no historical figures

Question 13

Pros and Cons of Zero Based Budget

Answer 13

Pros: Don’t waste the budget
Cons: Takes a long time

Question 14

Benefits of a Budget

Answer 14

Allows the business to plan what they are going to spend money on
Allocate resources within organisation
Monitor and control operations
Promote forward thinking
Motivate staff, gives direction

Question 15

Cons of a Budget

Answer 15

Businesses are dynamic lots will change
Can be time consuming
Errors and inaccuracies will lead to overspending
Budgets may cause conflict

Question 16

Favourable Variance

Answer 16

Manager has underspent budget in department, this is a success as any costs cut will have an impact on profit

Question 17

Adverse Variance

Answer 17

Manager has overspent and it depends on reasons, perhaps it would depend on the reasons, perhaps they needed more staff than was budgeted for and had to hire during the year.

Question 18

Difficulties of Budgeting

Answer 18

Budgets are often fixed, businesses are dynamic
Spend up to the time limit always
Time consuming
Unrealistic budgets can be demotivating
Budgets can cause inter-department rivalry
Can make managers short term focused
Difficult to plan ahead due to large unplanned changes

Question 19

Variance

Answer 19

What occurs when comparing the expected figures and what actual figures are.

Question 20

Variance Analysis

Answer 20

When you decide if the variance is favourable or adverse

Question 21

Direct Costs

Answer 21

Costs of production, wages, bills etc
The more you make, the more costs

Question 22

Indirect Costs

Answer 22

Costs that aren’t for production

Question 23

Profit and Loss Account

Answer 23

Also known as statement of comprehensive
End of trading year, the owner prepares a profit and loss account
Provides a summary of profit or loss made during the year
A profit and loss account is a financial document showing the company revenue or income over they year and their costs and expenditure

Question 24

Costs of Sales

Answer 24

Costs that can be directly attributed to the sales, depends on the no. sales

Question 25

Gross Profit

Answer 25

Sales- Costs of Sales
The profit made from selling the product

Question 26

Profit before taxation/ Operating Profit

Answer 26

Gross Profit- Expenses

Question 27

Net Profit

Answer 27

Operating profit- (Interest + Tax)

Question 28

Why are P+L Documents useful?

Answer 28

Allows a company to identify, quite quickly, if they have made a profit or loss

Question 29

Methods to improve a businesses profitability

Answer 29

Cut costs
Increase Revenue
Raise Prices
Buy Cheaper materials

Question 30

Differences between profit and cash: Profit

Answer 30

Profit is recorded straight away
A business can trade for many years before recording a profit
To improve their profit, a business must either increase revenue or reduce costs

Question 31

Differences between profit and cash: Cash

Answer 31

Will not be recorded until it is paid out or received
A profitable business may go bust if it runs out of cash to play a supplier or wages of staff
If owners introduce cash via saving or a loan this will not affect the profit

Question 32

MAIN Difference between Profit and Cash

Answer 32

Cash is always available, Profit is recorded immediately but isn’t there at the time

Question 33

Balance Sheet

Answer 33

It shows how much a business is worth
It also shows the assets, its liabilities and how it is financed