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Business-T > 2.5-managing finance > Flashcards

2.5-managing finance Flashcards

1
Q

The breakeven point is

A

The point at which revenue equals cost so your business is making neither a profit nor a loss

Total costs are the fixed and variable costs added together

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2
Q

Revenue (calculation)

A

Selling Price x Units Sold
-Money into the business through sales

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3
Q

Fixed costs

A

These are costs that do NOT vary with the level of output or sales. E.g. stall rental.

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4
Q

Variable costs

A

These are costs that DO change with the level of output or sales. For example, the plastics used in a Bobblehead. The more a business sells/produces, the more plastic they will need

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5
Q

Contribution

A

Contribution = Selling Price – Variable Costs

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6
Q

Breakeven calculation

A

Break even = Fixed Costs / Contribution

ALWAYS ROUND UP

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7
Q

Margin of safety (MOS)

A

-Difference between actual sales and break even point.

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8
Q

Limitations of break even

A

-Break-even analysis assumes that every item produced is sold
-In a service business the prices may differ
-Costs may increase
-Its only a best guess of what may happen
-In some businesses the fixed costs are shared across a portfolio of products

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9
Q

A budget is

A

Is a financial plan and an agreed spending limit within a business

-Budgets are based on the objectives of the business or organisation
-It means managers must think ahead and not just spend an unlimited amount of money in their department
-Usually 12 months so that it fits with the accounting period of a year, but research and development budgets (e.g. a cure for cancer) might have a longer term budget

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10
Q

Planning

A

Planning: to anticipate problems and develop solutions before they arise e.g. New business books are needed for a new spec

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11
Q

Motivation

A

Motivation: for managers to be in control of their own budget shows that the business feels they are responsible and will hold them accountable for the money

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12
Q

Decisions

A

Decisions: gives power to make financial decisions to those in the best position to make them e.g. a Headteacher may not know what kinds of books need to be ordered

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13
Q

Control

A

Control: Budgets are set against objectives and targets and can be used as a comparison tool to measure success

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14
Q

2 types of budget

A

-Historical Figures Budget
-Zero Based Budget

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15
Q

Historical figures budget

A

-This is a budget set for the business using current financial figures
-Realistic in that it is based on last years sales
-Business is dynamic so the figures may be wrong
-How much money will you spend?
-How much will you sell?
-How can you cut costs?

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16
Q

Zero based budget

A

-This is a budget set for a business by using figures based on potential performance
-This method takes away all historical assumptions and starts with a clean slate
-May also be used by a start-up with no historical data
-Managers must justify levels of expenditure based on the number of customers they are likely to serve in the next year

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17
Q

Benefits of budgeting

A

-provide a method of allocating and using resources within the organisation
-help to monitor and control operations
-promote forward thinking
-show employees an overall picture of the direction of the organisation which can motivate staff
-help to co-ordinate different departments and align them towards shared objectives

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18
Q

Disadvantages of budgeting

A

-The time that workers give to the budgeting process means they are not available to carry out other responsibilities.
-Errors and inaccuracies will always remain since it is impossible to predict the future.
-Budgets involve and affect people, they may cause conflict. There may be difficult choices over where limited funds are spent.

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19
Q

A variance is

A

A variance is when you compare the budget figures against what actually happens.

20
Q

Favourable variance –

A

Favourable variance – the manager has underspent in his department, this would be regarded as a success as any costs cut will have an impact on profit

21
Q

Adverse variance –

A

Adverse variance – the manager has overspent and it would depend on the reasons, perhaps they needed moremstaff than was budgeted for and had to hire during the year

22
Q

Difficulties of budgeting

A

-Budgets are often fixed for a year and as such inflexible, difficult when business is dynamic
-Tendency for managers to spend up to the limit
-Time consuming to prepare, monitor and control
-Unrealistic budgets can be demotivating
-Budgets can cause inter-department rivalry as some departments get more money than others
-Can make managers short-sighted, they become budget driven rather than customer driven
-Some industries its difficult to plan ahead because of large unplanned changes e.g. farmer and weather

23
Q

Profit and loss account

A

A profit and loss account is a financial document showing the company revenue or income over the year and their costs and expenditure

-Also known as Statement of comprehensive income
-End of the trading year the business owner prepares a profit and loss account
-Provides a summary of profit or loss made during the year

24
Q

Sales Revenue

A

The money obtained from sale of goods or services

25
Q

Gross Profit: Sales

A

Cost of sales (the profit made from selling the product)

26
Q

Net profit

A

= gross profit - expenses
= operating profit - interest + tax
A companies total earning after subtracting all expenses

27
Q

Why are P&L documents

A

-Can identify where costs are too high

28
Q

Profit

A

-Profit is recorded immediately after a sale

profit= total revenue - total costs

29
Q

Cash

A

-Cash inflow and outflows aren’t counted until creditor/debtor periods are lapsed

30
Q

Gross profit margin calc

A

GPM= Gross profit (sales - cost of sales) / revenue

31
Q

Liquidity

A

When a business does not have the cash flow to meet their immediate debts, we refer to this as liquidity. Businesses measure their liquidity to understand how secure their business is

32
Q

Balance sheet

A

-Document showing what a business owns- its
assets and what it owes – its liabilities.
-Snapshots of what the business is worth at a particular Time
-shows the sources of funds in the business and the uses of those funds

33
Q

limitations of a balance sheet

A

value of assets stated may not be the same as what they sell for
intangible assets may be harder to put a value of

34
Q

Assets

Liabilities

A

Asset- what the company owns

Liabilities- What the company owes

35
Q

Non-current-

Current-

A

non-current- long term (greater than a year)

Current- Short term (shorter than a year)

36
Q

Non-current assets

A

-The long term assets of a business which are not expected to be sold within the next year of trading
-Intangible assets might be; copyright, patents, trademarks, goodwill
-Tangible assets are; property, plant and equipment which might be factory machinery to make the chocolates
-Deferred tax assets is about the payment of taxes

37
Q

Current assets

A

-These are short term assets of the business which are likely to be turned into cash within the next year of trading
-Inventories are stocks of raw materials (coca beans), finished goods and work-in-progress
-Trade and other receivables are trade debtors who owe money to the business. Most business runs on trade credit so this figure is not a worry.
-Cash is cash at bank held by the business

38
Q

Non-current liabilities

A

-These are debts which are not expected to be paid off within the next year of trading
-Borrowings are long term (over 1 year) loans
-Retirement benefit obligations is money owed to past employees in pensions
-Other non-current liabilities might be money to pay for repairs to machinery

39
Q

Current liabilities

A

-These are debts which are expected to be paid within the next year of trading
-Trade and other payables are
-Borrowings are short term loans (less than a year) and overdrafts
-Current tax liabilities is corporation tax

40
Q

Uses of balance sheet

A

-To evaluate performance of the business
-To evaluate potential of a business to an investor
-It’s a summary valuation of the business

41
Q

Limitations of balance sheet

A

-Value of assets stated may not be the same as the amount they will sell for
-Intangible may include goodwill which is hard to put a value on
-A Balance sheet is a static snapshot of one day in a business and the next day the picture may change

42
Q

Current ratio calculation

A

Current assets / current liabilities

43
Q

The acid test ratio calculation

A

Current assets - stock / current liabilities

44
Q

Working capital calculation

A

Current assets - current liabilities

-Indicates business is in trouble if its low
-Is a measure of efficiency that compares assets to liabilities

45
Q

reasons business fail

A

-Online competition
-Over expansion
-Poor sales forecast

46
Q

Financial reasons for failure

A

-Poor cash flow management
-Lack of funds to pay tax bill
-Lack of capital which leads to excessive borrowing
-Borrowing from expensive source e.g. credit, card or overdraft

47
Q

Non financial reasons for failure

A

-Failure to innovate- failed to move fast enough
-Poor marketing- e.g. fake/bad ads
-Strong pound- Exporting will be affected
-Competition
-Civil unrest- riots, protests
-Gov policies- e.g. tax level, carbon emissions
-Natural disasters- earthquakes, parts abroad stopped

Business-T (11 decks)

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