3.5 decision making to improve financial perfirmance Flashcards
what is revenue
the amount (value) of a product that customers actually buy from a business
what is demand
the amount of a product that customers are prepared to buy
how can demand be measured
in terms of volume (quantity bought) and/or value (value of sales)
what factors can affect the level of demand
government decisions
prices and incomes
tastes and fashions
competitor actions
social and demographic change
changing technology
seasonal changes
how can the relationship between quantity demanded and price be shown graphically
on a simple demand curve
what is the formula for revenue
total revenue= volume sold x average selling price
what are the two main ways of increasing revenue
increase the quantity (amount) sold
-could do this by lowering price
-could offer volume related incentives
achieve a higher selling price
-could conduct market research
-best to add value than just increase price
what is profit
the total revenue minus total costs
- is measured in absolute terms
what is profitability
measures the amount of profit made in relation to the size (turnover) of the bus jess and as such measures how efficient the business is at generating profit
how can profitability be measured
via the net profit margin
what is net profit
the difference between total revenue and total costs
what is the net profit margin
the % return made on sales
how do you calculate the net profit margin
net profit/sales revenue x100
what does a business need to do to improve profit
increase sales revenue and/or reduce costs
what are the methods used to improve profit
-increasing/decreasing price- depends on price elasticity of demand
-labour productivity- an increase will lead to lower labour costs/unit therefore lower unit costs
-managing capacity-higher capacity utilisation will lead to lower unit costs
-promotion-there will be a cost involved however if sales volumes increase so will revenue
what is profit
the reward or return for taking risks and making investments
what is the formula for profit
total revenue-total costs
what are the three main profitability ratios
gross profit margin
return on capital employed
operating profit margin
what is the gross profit margin
revenue-cost of sales
how do you calculate the gross profit margin
gross profit/revenue x100
what is net/operating profit
what is left after all the costs of a business have been taken away from its sales revenue
what is the net/operating profit margin
operating profit/sales x100
what does net profit tell us
-how effective a business turns it’s revenue into profit
-how effective a business is run
-whether a business is able to ‘add value’ during the production process (a high margin business must be doing sonething right)
what should be done with the net profit margin over time
should be compared with competitors in the same market and over time
what is the formula for return on capital employed (ROCE%)
operating profit/capital employed x100
what should you do with ROCE
higher % is better
watch for trend over time
watch out for low quality profit which boosts ROCE
leased equipment will not be included i. capital employed
what is return on capital
a measure of the returns made from investing in the business
shows opportunity cost
provides a means of comparison with other investment opportunities
shows how good the business is at converting money invested into profit
what is the formula for return on capital
net profit (before tax)/capital invested x100
what is capital in terms of return on investment
the amount invested in a business
what is opportunity cost
what an investor could have done by investing elsewhere
what are costs
amounts that a business incurs in order to make foods and/or provide services
why are costs important
-are the difference between making a good or a bad profit
-are the main cause of cash flow problems in business
-change as the output or activity of a business changes
what are the two types of costs
variable or fixed
what are variable costs
costs which change as output varies
what are fixed costs
costs which do not change when output varies
examples of variable costs
-bought in stocks
-wages based on hours worked or amount produced
-marketing costs based on sales
-raw materials
what is the formula for total costs
total costs= fixed costs + variable costs
how does cash flow affect a business
cash flow is dynamic and unpredictable
cash flow problems are the main reason business fail
regular and reliable cash flow forecasting can adress many problems
what are some advantages of cash flow forecasts
+advanced warning of cash shortages
+important part of financial control
+make sure the business can pay suppliers and employees
+provide reassurance to investors and lenders that the business is being managed properly
examples of cash inflows
-cash sales
-receipts from trade debtors
-sale of fixed assets
-interest on bank balances
-grants
-loans from bank
-share capital invested
examples of cash outflows
-payment to suppliers
-wages and salaries
-payments for fixed assets
-tax on profit
-interest on loans and overdrafts
-dividends paid to shareholders
-repayment of loans
what is breakeven
break even (output) is reached when the total revenues= total costs
