Advanced Information for Paper 2 Flashcards
Contribution
The amount of each sale that is left after the cost of sales is taken off. This goes towards paying the fixed costs of a business
Contribution per unit
Selling price - Variable cost per unit
Total contribution
Contribution per unit x Quantity sold OR Total Revenue - Total Variable Costs
Break even output
Fixed costs / Contribution per unit. This shows the amount of units that must be sold in order to break even (meet all costs with revenue)
Break even chart
The chart that shows the costs and revenues on a graph, showing the point at which revenues meet with total costs.
Margin of safety
Actual output - Break even output. This shows how many sales the business was above the break even point.
Budget
A financial plan for the future concerning the revenues and costs of a business
Historical budgeting
Using last year’s figures as the basis for the next year’s budget
Zero budgeting
Setting budgets at £0 and people will have to put proposals forwards for sales and costs
Revenue / income budget
A budget showing expected revenues and sales
Cost / expenditure budget
A budget showing expected costs based on sales
Profit budget
A budget based on both the sales and cost budgets
Variance
Looking at the difference between a forecast budget and an actual budget
Favourable variance
Actual figure - Budgeted figure WHEN spending is less than budgeted, or revenue is more than budget
Adverse variance
Actual figure - Budgeted figure WHEN spending is more than budgeted, or revenue is less than budget
Gross profit
Revenue - Cost of sales
Operating profit
Gross profit - Fixed overheads OR Revenue - Cost of sales - Fixed Overheads
Net profit
Operating profit - Financing costs and tax OR Revenue - Cost of sales - Fixed overheads - Financing costs and tax
Profitability
The extent to which a business is able to make a profit
Liquidity
The extent to which a business is able to use cash to meet debts as they are due
Statement of comprehensive income
(Income statement) Measures the performance of a business over a given time period, comparing the income of the business against the cost of goods or services and expenses
(Balance sheet) A snapshot of a business’ assets (what it owns) and liabilities (what it owes)
Statement of financial position
Current assets
What a business owns and will be able to turn into cash in the next 12 months (i.e. stock, money in the bank)
Assets
What a business owns
Non-current assets
What a business owns that will last for over a year (i.e. a building, machinery)
Liabilities
What a business owes
Non-current liabilities
What a business owes over a longer term than the next 12 months (i.e. mortgages, long term loans)
Current liabilities
What a business owes within the next 12 months (i.e. suppliers debt, overdrafts, short term loans)
Credit control
The management of accounts owed on credit by the customers of a business
Debt factoring
Selling the rights to collect amounts owed by customers in order to release cash flow. Debt factoring involves a business selling their invoices to a third party at a discounted price in order to bypass the hefty waiting times which are associated with invoice payments.
Production capacity
The measure of how much output it can achieve in a given time
Capacity utilisation
The proportion of a business’ capacity that is being used within a specific time period. What percentage of the total capacity was produced?
Spare (excess) capacity
Where actual output is less than capacity
Excess demand
Where demand for a business’ products or services is more than their capacity
Ratio analysis
A series of ratios allowing a business to assess their profitability and liquidity
Ratio Analysis - Gross profit margin
(Gross profit / Revenue) x 100 A profitability ratio showing what percentage of the revenue is gross profit
Ratio Analysis - Operating profit margin
(Operating profit / Revenue) x 100 A profitability ratio showing what percentage of the revenue is operating profit
Ratio Analysis - Net profit margin
(Net profit / Revenue) x 100 A profitability ratio showing what percentage of the revenue is net profit
Ratio Analysis - Current ratio
Current assets / Current liabilities. A liquidity ratio calculated by dividing current assets by current liabilities
Ratio Analysis - Acid test ratio
Current ratio - Inventories / Current liabilities A liquidity ratio calculated by dividing current assets (minus stock) by current liabilities
Ratio Analysis - ROCE (Return on Capital Employed)
(Operating profit / Capital employed) x 100 A profitability ratio calculating the percentage of capital invested that is operating profit
Capital Employed
equity + non-current liabilities
Portfolio analysis
Where a business uses tools to identify strengths and weaknesses among their range of products
Strength
Features within the control of a business that are a source of competitive advantage.
Weakness
Features within the control of a business that are a source of competitive disadvantage.
Opportunity
Features of the external environment that create opportunities for a business to leverage its strengths towards.
Threat
Features of the external environment that threaten the performance and position of a business if not addressed.
External influence
Influences from outside the business
Political factor
Government policy and its administration that has the potential to change or influence a business. e.g. competition policy
Economic factor
Changes such as costs and prices of goods, interest rates, wage rates, exchange rates and the rate of inflation that have the potential to change or influence a business.
Social factor
Changes that affect lifestyle, such as religion, wealth or family. It is important for businesses to be aware of these factors as they are very important for marketing purposes. E.g changes in taste and fashion
Technological factor
Changes in technology available to businesses or consumers that have an impact on either a business or consumers. This could be to change the way consumers and businesses interact, or a change in production technology available to a business, for example.
Legal factor
Law and changes in law that have an impact on either businesses or consumers. E.g. the minimum wage act.
Environmental
Changes in the way businesses or consumers look at and care for the environment, or changes to the environment that have an impact on business.
Quantitative
Something numeric / based on statistics
Sales forecast
A prediction of future revenues
Moving average
Calculated to smooth out fluctuations in data (e.g. sales) to provide a smoother, more averaged line. Calculated by adding together data points and dividing by the number of data points.
Extrapolation
The use of trends established by historical data to make predictions about future values.
Correlation
A method of forecasting that looks at the strength of a relationship between two variables.
Trend
Used to identify patterns in behaviour, such as sales increasing or decreasing.
Investment appraisal
An evaluation of the attractiveness of an investment proposal, using methods such as average rate of return (ARR), net present value (NPV), or payback period.
Investment
The act of committing money or capital to a business project with the expectation of obtaining an additional income or profit.
Payback period
The act of committing money or capital to a business project with the expectation of obtaining an additional income or profit.
ARR
The total accounting return for a project to see if it meets a target. Or the average amount of profit the project returns per year as a percentage of the initial investment cost. ((Net return / Number of years) / Initial Cost)) x 100
Discounted cash flow / Net present value
Calculates the monetary value now, of the projects future cash flows. Using discount factors to show that £100 in 3 years is not worth the same as £100 now.
Creditors
An individual or business that is owed money by an individual or business
Debtors
An individual or business who owes money to an individual or business.
Profitability ratios
A series of financial ratios that analyse how much a business is able to make a profit
Liquidity ratios
A series of financial ratios that analyse the ability of a business to meet short term debts.
Gearing
A ratio that calculates the proportion of a business’ capital that is in the form of debt. Non-current liabilities/ capital employed
Capital employed 2
Capital employed = Share capital + retained earnings + long-term liabilities
Equity
The proportion and amount of the capital structure that is provided by shareholders or left as retained profits
