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Business- Mr Owens > 3.5 decision making to improve financial performance > Flashcards

3.5 decision making to improve financial performance Flashcards

1
Q

Return

A

how much money the business is getting back

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2
Q

Investment

A

How much capital is being used within the business

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3
Q

Return on investment

A

A measure of a firms profitability and performance. How effectively is it using the money tied up in the business to generate profit.

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4
Q

ROI formula

A

( operating (net) profit / capital invested ) x 100

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5
Q

Capital structure

A

The proportion of long term funding that is debt. Refers to the relative ways in which the capital has been raised. ie the ratio of equity to debt.

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6
Q

Long term funding

A

the amount of capital that has been invested in a business and will stay in the business for over a year. (normally for the purchase of assets)

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7
Q

What 2 sources can long term funding come from?

A

1) equity
2) debt

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8
Q

Equity

A

i.e capital invested by the shareholders of a company.

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9
Q

Debt

A

i.e money borrowed from financial institutions

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10
Q

formula for profit

A

revenue-total costs

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11
Q

revenue objectives

A

targets set for amount of money coming into a business from sales in a set period of time.

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12
Q

Cost objectives

A

limits set for the amount of money to be spent on expenditure in a set period of time.

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13
Q

Profit objectives

A

targets set for the amount of surplus to be achieved in a set period of time

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14
Q

cash flow

A

the movement of money coming i and out of the business

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15
Q

cash flow (liquidity) problems

A

If the net effect is negative ( more money flowing out quicker than in)

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16
Q

internal influences (within business)

A

1) corporate (overall) and other functional (individual department) objectives.
2) characteristics of the firm (what type of business is it?)
3) public sector-owned by gov, or private sector-entrepreneurs etc..

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17
Q

External influences (outside business)

A

1) competitors
2) consumers changes, tastes & fashion
3) economic conditions- interest rates, inflation, GDP (measurement of economic growth)

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18
Q

Budgets

A

Forecasts/plans for the future finances of a business. (an estimate)
Can be for business as a whole or set for specific fuctions e.g marketing budget.

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19
Q

what are the 3 types of budgets?

A

1) income,
2) expenditure,
3) profit

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20
Q

Income budgets

A
  • Target set for the amount of revenue to be achieved in set time period.
  • Can be split by products, services or departments.
  • May be translated into individual sales targets for staff.
    -Informed by market research & sales forecast.
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21
Q

Expenditure budgets

A
  • A limit placed on the amount to be spent in a given period of time.
  • Can be split by department, function or product.
  • Responsibility can be passed to individual managers
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22
Q

Profit budgets

A
  • A target set for the surplus between income and expenditure in a given period of time.
  • Calculated based upon the income & expenditure budget
  • May be set for the business as a whole or for individual departments, products or branches.
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23
Q

What is a variance ?

A

the amount by which the actual results differ from the budgeted figure.

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24
Q

adverse budgets

A

when the actual results are WORSE than the budgeted results.

25
Q

favourable budgets

A

when the actual results are BETTER than budgeted results.

26
Q

benefit to carrying out variance analysis

A

the business may get an early warning of adverse variances so they can put plans in place to stay within the budget.

27
Q

What is the stages in the process of setting budgets?

A

1- set clear objectives
2- carry out market research
3- produce a sales forecast
4- set income budget
5- set expenditure budget
6- set profit budget
7-set divisional targets
8- review against objective & highlight any adverse variances

28
Q

What are the advantages to setting budgets?

A
  • helps business monitor & control its costs.
  • allows business to set targets for individual departments.
  • some businesses it can be used to set targets for individual employees.
  • can be motivational as gives some managers financial responsibility.
29
Q

What are the disadvantages to setting budgets?

A
  • dependent upon predictions & forecasts.
  • costs are subject to change( e.g inflation makes materials go up in price).
  • actions of competitors are unknown.
  • managers may lack experience so budget inaccurate.
  • takes time & effort- has associated opportunity cost itself.
  • sometimes businesses miss out on future opportunities so they can keep within budget.
30
Q

Breakeven

A

neither making a profit or a loss. (total cost is equal to total revenue)

31
Q

formula for breakeven point (units)

A

fixed cost / (selling price - variable cost per unit)

32
Q

Breakeven chart

A

A diagram that represents a businesses breakeven position and can also be used to make an analysis in relation to potential profit.

33
Q

what do breakeven charts show?

A

-breakeven level of output
-areas of profit & loss
-profit & loss at diff levels of output
-the margin of safety

34
Q

Margin of safety

A

shows how much demand for the product can fall before the business will begin to make a loss. (difference between actual sales and breakeven output)

35
Q

Formula for margin of safety

A

Actual sales- breakeven output

36
Q

what happens to the breakeven point when cost of raw materials decline? (variable cost)

A

breakeven decreases

37
Q

what happens to breakeven point when costs stay same but prices fall?

A

breakeven increases

38
Q

what happens to breakeven point when costs stay same but prices rise?

A

breakeven decreases

39
Q

what happens to the breakeven point when fuel costs rise?

A

breakeven increases

40
Q

what happens to the breakeven point when demand for a product falls?

A

Stays same-margin of safety reduces

41
Q

Each time a product/service is sold what does the money provided from it contribute towards?

A
  • own variable costs then contributes towards fixed
  • until enough contributions to cover fixed costs business cannot start to make a profit
  • the difference between selling price and variable cost each time an item sold is contributed to FC.
  • business has to keep putting excess contribution towards fixed costs until all payed off.
42
Q

Contribution per unit

A

difference between selling price per unit and variable cost per unit ( how much is left to contribute-firstly to costs then profit)

43
Q

formula for contribution per unit

A

selling price per unit - variable cost per unit

44
Q

total contribution

A

difference between total sales revenue and total variable costs. (contribution per unit multiplied by qty sold)

45
Q

formula for total contribution

A

contribution per unit x volume sold

46
Q

What are the strengths of breakeven?

A
  • allows businesses to calculate min number of sales needed before profit starts, foresee if venture is viable.
  • calculate level of profit/loss at diff levels.
  • predict outcome of changing variables
  • provides a target.
  • an integral part of business plan when setting to secure finance.
  • aids decision making.
47
Q

What are the weaknesses of breakeven?

A

-based on predicted costs & revenue
- even fixed costs can vary in reality especially in long run
- assumes products all sold at same price.
-only indicates number of sales needed, does not ensure actual sales will materialise.

48
Q

Profitability

A

Measures the financial performance of a business by comparing profits achieved to a second variable e.g revenue.

49
Q

what 3 profitability ratios will you study in year 1?

A

1- gross profit margin
2-operating profit margin
3-profit for the year margin

50
Q

Gross profit margin (GPM)

A

A measure of a firms profitability by looking at the relationship between gross profit and sales revenue.

51
Q

if GPM is falling/low what does this indicate about a firm?

A

-the firm is not managing their costs of sales effectively.
-sales are in decline.

52
Q

formula for GPM

A

( gross profit / sales revenue ) x 100

53
Q

operating profit margin (OPM)

A

measure of a firms profitability by looking at the relationship between net profit and sales revenue.

54
Q

if OPM is falling/ low what does this indicate about a firm?

A
  • that it isn’t managing its expenses effectively e.g wages increasing or overheads going up like electricity.
    -sales are in decline
55
Q

formula for OPM

A

( operating profit / sales revenue ) x 100

56
Q

Profit for the year margin

A

measure of a firms profitability by looking at the relationship between profit for the year and sales revenue.

57
Q

if profit for the year is low/ falling what does this indicate about a firm?

A
  • gross profit/ net (OP) profit are in decline
  • interest sales have changed
  • taxation rates have changed
58
Q

formula for profit for the year margin

A

( profit for the year / sales revenue ) x 100

Business- Mr Owens (7 decks)

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