2.5-managing finance Flashcards
The breakeven point is
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
Revenue (calculation)
Selling Price x Units Sold
-Money into the business through sales
Fixed costs
These are costs that do NOT vary with the level of output or sales. E.g. stall rental.
Variable costs
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
Contribution
Contribution = Selling Price – Variable Costs
Breakeven calculation
Break even = Fixed Costs / Contribution
ALWAYS ROUND UP
Margin of safety (MOS)
-Difference between actual sales and break even point.
Limitations of break even
-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
A budget is
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
Planning
Planning: to anticipate problems and develop solutions before they arise e.g. New business books are needed for a new spec
Motivation
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
Decisions
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
Control
Control: Budgets are set against objectives and targets and can be used as a comparison tool to measure success
2 types of budget
-Historical Figures Budget
-Zero Based Budget
Historical figures budget
-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?
Zero based budget
-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
Benefits of budgeting
-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
Disadvantages of budgeting
-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.
A variance is
A variance is when you compare the budget figures against what actually happens.
Favourable variance –
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
Adverse variance –
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
Difficulties of budgeting
-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
Profit and loss account
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
Sales Revenue
The money obtained from sale of goods or services
Gross Profit: Sales
Cost of sales (the profit made from selling the product)
Net profit
= gross profit - expenses
= operating profit - interest + tax
A companies total earning after subtracting all expenses
Why are P&L documents
-Can identify where costs are too high
Profit
-Profit is recorded immediately after a sale
profit= total revenue - total costs
Cash
-Cash inflow and outflows aren’t counted until creditor/debtor periods are lapsed
Gross profit margin calc
GPM= Gross profit (sales - cost of sales) / revenue
Liquidity
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
Balance sheet
-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
limitations of a balance sheet
value of assets stated may not be the same as what they sell for
intangible assets may be harder to put a value of
Assets
Liabilities
Asset- what the company owns
Liabilities- What the company owes
Non-current-
Current-
non-current- long term (greater than a year)
Current- Short term (shorter than a year)
Non-current assets
-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
Current assets
-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
Non-current liabilities
-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
Current liabilities
-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
Uses of balance sheet
-To evaluate performance of the business
-To evaluate potential of a business to an investor
-It’s a summary valuation of the business
Limitations of balance sheet
-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
Current ratio calculation
Current assets / current liabilities
The acid test ratio calculation
Current assets - stock / current liabilities
Working capital calculation
Current assets - current liabilities
-Indicates business is in trouble if its low
-Is a measure of efficiency that compares assets to liabilities
reasons business fail
-Online competition
-Over expansion
-Poor sales forecast
Financial reasons for failure
-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
Non financial reasons for failure
-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
