3.5 - FINACIAL PERFORMANCE

Question 1

Finacial objectives

Answer 1

• finacial goals the business wants to achieve
• can help with coordination and act as a focus for decision making
• companies set revenue, cost and profit objectives

Question 2

Cashflow objectives

Answer 2

• cashflow = all the money flowing in and out of the businesss over a period of time
• cashflow objectives are put in place to help prevent cashflow problems
• may be set to help spread costs more evenly throughout the year

Question 3

Internal influences on financial objectives

Answer 3

• overall objectives of the business
• the status of the business (new/established)
• other department’s

Question 4

External factors influencing financial objectives

Answer 4

• avalibity of finance
• competitors
• the economy
• shareholders
• environmental/ethical influences

Question 5

Percentage change in profit

Answer 5

Current years profit-last years profit/last years profit x 100

Question 6

Different methods of increasing profits

Answer 6

• increasing prices
• decreasing prices to increase demand
• reduce costs of production
  -increase advertising to increase demand
• improving quality

Question 7

Gross profit

Answer 7

• amount left over when the cost of sales has been subtracted from sales revenue
• cost of sales includes the costs directly related to making the product
• gross profit = sales revenue - cost of sales

Question 8

Operating profit

Answer 8

• takes into account all costs from regular trading, but not revenues from one off events
• considers both the costs of sales and operating expenses
• operating profit = sales revenue - cost of sales - operating profit

Question 9

Profit for the year

Answer 9

• takes into consideration costs from one-off events and financial costs
• profit for the year = operating profit + other profit - net finance costs - tax

Question 10

Gross, operating and profit for the year margins

Answer 10

• gross profit margin = gross profit/revenue x 100
• operating profit margin = operating profit/revenue x 100
• profit for the year = profit for the year/revenue x 100

Question 11

Advantages of budgeting

Answer 11

• helps achieve targets
• helps control income & expenditure
• helps review their decisosn
• helps focus on priorities
• help coordinate spending in different department’s

Question 12

Disadvantages of budgeting

Answer 12

• can cause resentment in rival departments
• can be restrictive
• time-consuming
• inflation is difficult to predict

Question 13

What are the types of budgets?

Answer 13

• income
• expenditure
• profit

Question 14

Income budget

Answer 14

• forecast the amount of money that will come into the company as revenue
• to do this the company need to predict hoe much they will sell and t what price
• they use previous sales and market research to estimate

Question 15

Expenditure budgets

Answer 15

• predict what the business total costs will be for the year, taking into account both fixed and variable costs

Question 16

Profit budget

Answer 16

• income budget - expenditure budget to calculate what the expected profit will be for the year

Question 17

Budgets and flexibility

Answer 17

• fixed budgeting = discipline & certainty, important for businesses with liquidity problems
• flexible budgeting = allows budgets to be altered in response to significant changes in the market/economy
• zero-based budgeting = more flexibility than historical based budgeting

Question 18

What is variance?

Answer 18

• The difference between actual figures and budgeted figures
• favourable variance - revenue is more than budget says (leads to increased profits)
• adverse variance - selling fewer items tan the income budget said (leads to decrease in profits)

Question 19

External factors causing variance

Answer 19

• competitor behaviour & changing demands may increase/educe demand
• changes in the economy can change workers wages
• the cost of raw materials can change

Question 20

Internal factors that cause variance

Answer 20

• improving efficiency
• overestimating sales
• underestimating cost of production
• changing the selling price

Question 21

What is break-even?

Answer 21

• the level of sales a business needs to cover its costs
• if below break even output then costs are more than revenue (loss)
• of above break-even output then revenue exceeds costs (profit)

Question 22

How do you work out beak-even?

Answer 22

• contribution per unit = selling price per unit-variable costs per unit
• total contribution = total revenue - total variable costs OR contribution per unit x number of units sold
• break-even = fixed costs/contribution per unit

Question 23

Break even charts

Answer 23

• output is on the horizontal axis
• costs and revenue go on the vertical axis
• plot fixed costs (normally straight line) and revenue (normally diagonal line)
• the break-even output is where the revenue line crosses over with total costs line

Question 24

Margin of safety

Answer 24

• the amount between actual output and break-even output
• margin of safety = actual output - break-even output

Question 25

Advantages of break-even analysis

Answer 25

- it’s easy to do - quick - lets businesses know how variations in price&costs effect how much they need to sell - help persuade bank if they need loans - helps make decisions on whether new products should be launched

Question 26

Disadvantages of break-even analysis

Answer 26

- Assumes that variable costs always rise steadily - simple for one product but can get confusing with a whole business - if data is wrong, then results will be wrong - assumes there is no wastage - only says how many you need to sell not how many you will sell

Question 27

Payables

Answer 27

- people that the business owes to

Question 28

Receivables

Answer 28

- money that is owed to the business

Question 29

Retained profit

Answer 29

- profit can be retained and invested back into the business - may benefit as no interest has so be paid - shareholders may object as it can be used as dividends

Question 30

Overdrafts

Answer 30

- banks lets businesses have a negative amount - quick and easy to set up - high rats of interest

Question 31

Debt factoring

Answer 31

- when banks and other financial institutions take unpaid invoices off the hands of the business and give them an insant cash payment - advantage - instantly get money - disadvantage - company keeps some money as a fee

Question 32

Banks loans

Answer 32

- external source of finance that firms can pay back over certain amount of time - advantages - guaranteed money, bank wont own any of business, interest rates usually lower than an overdraft - disadvantage - difficult to arrange, keeping up with repayments is difficult

Question 33

Share capital

Answer 33

- ordinary share capital - money raised by selling shares

Question 34

Venture capital

Answer 34

- funding in the form of share or loan capital that is invested into the business - venture capitalists are professional investors who invest in businesses that they think have the chance to be successful