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AQA A-level Business > 3.5 Decision making to improve financial performance > Flashcards

3.5 Decision making to improve financial performance Flashcards

1
Q

Financial Objectives - RETURN ON INVESTMENT

A

Tells you how much profit you’ve made (or lost) on an investment after accounting for its cost

Return on investment = (operating profit x 100) / capital invested

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2
Q

Profit

A

Profit = sales - total costs

When revenue is greater than expenditure

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3
Q

Revenue Objectives

A

Revenue growth (% or value)

Sales maximisation

Market share

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4
Q

Cost Objectives

A

Cost minimisation aims to achieve the most cost-effective way of delivering goods and services to the required level of quality

Cost minimisation leads too lower unit costs –> higher gross profit margin and operating profits –> improved cash flow & higher return on investment

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5
Q

Profit Objectives

A

Specific level of profit

Rate of profitability

Profit maximisation

Exceed industry or market profit margins

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6
Q

Cash flow objectives

A

Minimise interest costs

Reduce amounts held in inventories or owed by customers

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7
Q

Objectives for investment - CAPITAL EXPENDITURE

A

Capital expenditure - spending on non-current assets such as vehicles and property

Objectives may include:
Lowering capital expenditure to reduce amount it has borrowed if the debts are too high

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8
Q

Reasons for why its easy to raise capital for a business

A

The business hasn’t borrowed excessive amounts already –> reassuring lenders that they will be able to repay the money

The business is purchasing non-current assets e.g. property that will retain its value and could be sold if necessary to repay a loan

The business is a company and can sell additional shares to raise funds

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9
Q

Capital Structure and gearing ratio

A

Capital structure - refers to the way in which a business has raised the capital it requires to purchase its assets

Gearing ratio = non current liabilities / total equity + non current liabilities x 100

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10
Q

Capital structure - LOAN CAPITAL & SHARE CAPITAL

A

LOAN - Have to pay interest on these loans until they are repaid

SHARES - have to pay dividends to shareholders BUT, company may lose control if they sell to many shares to existing owners

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11
Q

Budgets and the different types

A

Budgets are financial plans that predict revenue from sales and expected costs

3 types of budgets include:
Revenue budgets
Expenditure budgets
Profit budgets

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12
Q

Difficulties in constructing budgets

A

Sales forecasting –> depends on market research, changes in tastes & fashions, changes in consumer income, new technology, rivals

Costs –> unexpected costs can arise e.g. through external environment (taxes, exchange rates)

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13
Q

Analysing budgets

A

2) Analysing revenue data –> effective managers will use the info from analysing budgets to improve sales performance e.g. considering pricing, quality, and advertising of the product

3) Analysing profit budgets –> Allows managers to take action if profit falls e.g. by cutting expenditure & boosting revenue from sales

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14
Q

Analysing budgets - VARIANCE ANALYSIS

A

Variance analysis is the process of investigating any different between predicted data and actual figures

Two types of variance analysis include adverse and favourable

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15
Q

Favourable variances and examples

A

Difference between actual and budgeted figures will result in the business enjoying higher profits than shown in the budget –> so its positive

Examples include - budgeted sales revenue is lower than actual sales revenue or actual expenditure on fuel is less than budgeted figure

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16
Q

Adverse variances and examples

A

Occurs when the difference between the figures in the budget and the actual figures will lead to the firm’s profits being lower than planned –> so its negative

Examples include - actual overheads turn out to be higher than in the budget or actual sales revenue is below the budgeted figure

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17
Q

Value of budgeting - ADVANTAGES

A

Allow managers to control finances effectively –> by making informed and focused decisions

Can help motivate staff –> employees gain satisfaction when being given responsibility for a budget

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18
Q

Value of budgeting - DISADVANTAGES

A

Budgets can lead to short term decisions to keep within the budget rather than the right long term decision which exceeds the budget

Managers can become too preoccupied with setting & reviewing budgets and forgetting to focus on the real issues of winning customers

If budget decisions are delegated to employees then this leads to higher costs as more money will be spent on training employees

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19
Q

Cashflow Forecasts - Reasons why a manager might forecast cashflow

A

1) To support application for loans –> banks are more likely to lend money to businesses that evidence of financial planning as they will have carefully planned out to avoid cashflow crises

2) To help avoid unexpected cashflow crises –> cashflow forecasts help a business to ensure they don’t suffer when they are short of cash & unable to pay debts

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20
Q

Constructing cashflow forecasts

A

1) Cash in = cash inflows into the business e.g. cash sales, loans

2) Cash out = cash outflows from the business e.g. expenditure on raw materials, wages, rent, fuel etc.

3) Net monthly cash flow - consists of opening and closing balance
- Net cash flow = total outflows - total inflows

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21
Q

Analysing cashflow - PAYABLES

A

Relates to the amount of time taken by a business to pay its suppliers and other creditors –> normally expressed in terms days

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22
Q

Analysing cashflow - RECIEVABLES

A

Relates to the time taken by a businesses customers to pay a business for the products that it has supplied –> normally expressed in terms of days

If receivable days are higher than payable days –> incurs cashflow problems because business is incurring cash outflow before they have received an inflow –> may lead to a cash shortage

23
Q

Analysing cash flow - TRADE CREDIT

A

Trade credit - period of time given by suppliers before customers have to pay for goods or services

Trade credit can help win customers over as it reduced pressure on customers cashflow as they have additional time to pay

Links to the time period given for receivables

24
Q

What is break-even?

A

Level of output where TC exactly equal TR

25
Q

Break-even output formula

A

Break-even = fixed costs / (selling price - variable costs)

26
Q

Contribution per unit & total contribution

A

Contribution per unit = selling price - variable cost

Total contribution = contribution per unit x units sold

27
Q

Margin of safety

A

Where the current level of output exceeds break-even output

Margin of safety = actual level of output − Break-even level of output

28
Q

Value of break-even analysis - ADVANTAGES

A

Can be completed quickly providing immediate results

Can be of value when applying for a bank loan as break-even analysis provides credibility of financial planning

Allows most managers to use it without need for expensive training —> so more suitable for newly established & small businesses

29
Q

Value of break-even analysis - DISADVANTAGES

A

Most businesses sell more than one product, so break-even for the business becomes harder to calculate

Sales are unlikely to be the same as output – there may be some build up of stocks or wasted output too

30
Q

Analysing Profitability - GROSS PROFIT and GROSS PROFIT MARGIN

A

Gross profit = revenue - cost of sales
Gross profit margin = gross profit / revenue x 100

31
Q

Analysing profitability - OPERATING PROFIT

A

Operating profit = gross profit - operating expenses
Operating profit margin = operating profit / revenue x 100

32
Q

Analysing profitability - PROFIT FOR THE YEAR MARGIN

A

Profit for the year margin = profit for the year / revenue x 100

33
Q

Sources of Finance - DEBT FACTORING

A

External and short term source of finance

Debt factoring is when a business sells their invoices / receivables to a factoring company at a discount (90%) for cash now –> factoring company then collects the receivable from customers and sends the remaining 10% of the money however they take a 3% fee of it so business technically gets 97% of the money

34
Q

Debt factoring - ADVANTAGES

A

Receivables (amounts owed by customers) are turned into cash quickly!

Business can focus on selling rather than collecting debts

There is no security required – unlike a loan or overdraft.

35
Q

Debt factoring - DISADVANTAGES

A

Quite a high cost – 3% fee –> reduces business profits

Customers may feel their relationship with the business has changed

36
Q

Sources of Finance - BANK OVERDRAFTS

A

External and short term source of finance

An overdraft is a facility offered by banks allowing businesses to borrow up to an agreed limit of money for however long

37
Q

Bank Overdrafts - ADVANTAGES

A

Flexible way of funding day-to-day financial requirements

38
Q

Bank Overdrafts - DISADVANTAGES

A

Interest rates are high –> on the long-term it is very expensive

Bank may demand for a repayment at any time

39
Q

Sources of Finance - RETAINED PROFITS

A

Internal and short term source of finance

Through previous profits, the owners either extract it from the business by way of dividend, or use it for reinvestment

40
Q

Retained Profits - ADVANTAGES

A

Flexible – management have complete control over how they are reinvested and what proportion is kept rather than paid as dividends

Cheap - don’t have to pay interest

They don’t dilute the ownership of the company

41
Q

Retained Profits - DISADVANTAGES

A

Shareholders may prefer to receive dividends

Danger of hoarding cash

42
Q

Sources of Finance - SHARE CAPITAL

A

External and long term source of finance

Money invested in the company by shareholders –> so shareholders receive part-ownership of a business (share) –> companies raise capital by selling shares

43
Q

Share capital - ADVANTAGES

A

Company doesn’t have to pay any interest

44
Q

Share capital - DISADVANTAGES

A

Existing owners may risk losing control of their business

Profit is divided up as dividends to all shareholders

45
Q

Sources of Finance - BANK LOANS

A

External and long term source of finance

Loan provided to a business by a bank for a fixed period of time

Two types of bank loan include: mortgages and debentures

46
Q

Bank Loans - ADVANTAGES

A

Flexibility with a bank loan –> can spend it on whatever, while other sources of finances are restricting

You have full control –> no risk of losing control

47
Q

Bank Loans - DISADVANTAGES

A

Have to pay interest on them

Business needs to have evidence of financial planning before bank gives a loan –> if business doesn’t have much collateral (security) the bank may implement a higher interest rate

48
Q

Sources of Finance - VENTURE CAPITAL

A

External and long-term source of finance

Almost a mix between share capital and a bank loan

Organisations and individuals providing venture capital which to have some control over the business for which they are providing finance

Financing provided to small start up businesses that are high risk but have high growth potential

49
Q

Venture Capital - ADVANTAGES

A

Brings expertise advice into the business

Great source of finance for start-up businesses

No obligation for repayment

50
Q

Venture Capital - DISADVANTAGES

A

Risk of losing control

Usually on able to raise small amounts of finance

51
Q

Methods of improving cash flow

A

1) Improved control of working capital

3) Offer less trade credit –> get customers to pay in a short period of time

4) Debt factoring –> get cash straight up which leads to lower overdraft and pay less interest

5) Arrange short-term borrowing –> e.g. loans or overdraft which allows businesses to borrow an agreed amount of cash for a short period of time

52
Q

Difficulties of improving cash flow

A

Customer loyalty may reduce if they are offered less trade credit & will move to other businesses offering better trade credit terms

Using debt factoring may reduces profit margins due to the small fee required by factoring companies

Interest rates on loans and overdrafts are high and banks needs collateral / security of financial planning before giving a loan

53
Q

Methods of improving profits and profitability

A

1) Reduce costs of production

2) Increase prices

3) Use capacity fully –> if capacity is fully used then fixed costs will be spread across more units of output, –> reducing average cost

4) Advertise more –> increase brand awareness and sales

5) Improve efficiency e.g. from capital intensive production

54
Q

Difficulties of improving profit

A

Reducing costs may result in poor quality products –> reduces customer satisfaction and loyalty & will be harder to attract high-quality customers in the future

AQA A-level Business (10 decks)

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