buiness unit 3 part 1 Flashcards
what is a pie chart
a pie chart is a circular chart that is split into sectors that show the percentage or the relative value of different categories of data
what does it show?
it does give a good visual representation of the relative sizes or shares of a whole that can make the different categories of data easier to compare than if the same data was presented in a table
what can it be used to show
-market income
-market share for products or something more specific such as the sales revenue for different types of pizza sold by a pizza chain.
what are the disadvantages of using a pie chart?
pie charts do not give very detailed information, they only give an overall picture of the information presented.
-They are also not effective for showing increases or decreases of proportion over times as trend are not shown and data cannot be extrapolated.
-they also do not show casual relationship such as the impact of advertising spend on sales revenue, meaning that additional information would be needed t support data presented in pie charts.
what are the advantages of using a pie chart?
they could help businesses to make decisions for example if the sales of a specific pizza with a mushroom tuna and pineapple topping had proportionate fewer sales than any other pizza that a business was selling, then they could consider withdrawing the product or promoting it more.
- it does also summarise a large set of data in a visual format
-a lot simpler than other types of graphs
-does display multiple data
what is a bar chart?
a bar chart is another visual way of presenting data. data is usually grouped into categories using rectangular bars with the heigh of the bar representing the frequency for the category.
-bars could be presented vertically or horizontally
-one axis would show the categories compared and the other would show the frequency.
what are the advantages?
would allow the data to be presented in a clear format.
-are useful to summarise a large amount of data in a visual format
-all key values could be highlighted quickly and they are used throughout the business to show financial data
summarize a large data set in visual form.
clarify trends better than do tables.
estimate key values at a glance.
what are the disadvantages of using a bar chart?
- could oversimplify data and further explanations could be needed to give an accurate analysis of data.
-data could also be manipulated to show false results and patterns.
-do fail to reveal key assumptions
-would require additional information
what is a histogram?
a graphical display of data using bars of different heights. Histograms do show qualitative data unlike bar charts. the data in a histogram is continuous so there are no gaps between the bars which represent the different intervals.
what is in a histogram?
area of each bar is proportional to the frequency for each interval. both x axis and y axis do have a scale. in the bar chart the heigh of the bar does indicate the frequency of the category and only the y axis has a numerical scale.
what are the advantages of using a histogram?
does show the shape of the distribution for a large set of data.
- are very good when displaying data that had chronological categories or numerical groupings.
-could also help depict large differences in the shape or symmetry of the data collected.
what are the disadvantages of using a histogram
- cannot be used for exact values as the data is grouped into intervals.
-effectiveness of data does decrease when the range of data is too wide. - data is perhaps less meaningful if the groups are very large
what is a index number?
- it is a data figure that does reflect changes in price or quantity. index numbers would enable users to quickly assess changes in a series of data
how is an index number calculated what is the formula?
a base data value for a specific time is chosen and that is given an index number of 100. subsequent and previous data to the base value can then be converted into index number format.
index number = {value in year b(comparison year)} / value in year a (base year) x 100
what is the formula for income elsacity of demand?
income elasticity of demand = % change in quantity demanded/ % change in income
percentage change = old- new/ old x 100
generally real income increasing over time leading to increased wealth and rising demand for most, but not all good and services. Normally as people get richer, they do consume more driving up demand for many good and services
what is normal good elastic?
(number is greater than 1) positive and high
it would mean that a change in come does cause a more than proportional change in the quantity demanded.
-would resulting in applying to luxury good and services. for example if consumer income decreases then this could result in a fall in cruise holidays or designer handbags.
what is a normal good?
a normal good is inelastic (the number is between 0 and 1). it would mean that a change in come cause a less than proportional change in demand. this would usually be true for necessity good/ services.
-for example fruit and veg
what is an inferior good?
an inferior good is where the number is negative. it would mean that as income does increase, demand would fall and vice versa. example does include own branded goods and public transport.
what would happen if a business is producing inferior goods, with a negative yed?
demand would increase during period of recessions and economic downturn.
-retailers could be advertise their value products. it could be found to attract customers trying to survive on a tight budget.
-if a business does produce an inferior good and economic growth in the long term is positive, they should consider diversifying into producing normal goods.
what does it mean if a business is producing a luxury good, goods with a yes above 1 ( positive and high). and the income is elastic.
-would mean that demand would be sensitive to change in come.
- all high economic growth could lead to a boom in sales but the business should be aware that this boom in sales could core crash to an end if the economy did go into a recession.
-all businesses should be nervous about overstretching themselves. they could also be a case to diversify.
what is sales forecasting?
A sales forecast is an expression of expected sales revenue. A sales forecast estimates how much your company plans to sell within a certain time period (like quarter or year). The best sales forecasts do this with a high degree of accuracy.
what other parts of the business does sales forecast plan the basis of?
human resource plan
production/ capacity plan
break even analysis
profit forecasts and budgets
part of regular competitor analysis and helps to focus on market research
product life cycle
what are the factors that do affect the accuracy and reliability of sales forecasts? sales forecasting does require a subjective judgement about an uncertain future.
consumer trends, if a trend does suddenly emerge sales would increase and sales forecasting would change as there would be a dramatic upward trend in sales.
- however trend are unpredictable and they could suddenly decline or go away for a period of time leading to a dramatic change in sales.
-predication’s could not always be accurate sales forecasting over 3+ years could change a lot over time it would be hard to predict whether sales would change or not as trends could emerge
economic variable could impact sales forecasting by average income, yed, inflation, recession. change in the cost of living can impact as people income decreases sales forecasting would also decrease as less people are in a position to afford products.
- factors such as unemployment growth, trade laws e.g. tariffs, interest rates, exchange rates.
if people income does increase then sales forecasting could also change as more people culd afford products.
competitor actions
competitors could change in the marketing mix.
new disruptors
competitors going under could help
merges and take overs
where could sales forecasting be inaccurate?
business is a new start up
market subject to disruption from technological change
demand is sensitive to change in price and income (elascity)
product is a fashion item
significant change in market share
management have demonstrated poor sales forecasting ability in the past
sales forecasting qualitative methods. what is that?
they would make use of judgements and opinions
what is hunch?
could be described as an educated guess.
-forecast based on hunch would be likely to be influenced by the experience of the forecaster, perhaps influenced by market research or from discussions that he or she has had with other in the market.
-experienced marketing manager with alot of year experience would have strong insights into the sales prospects for individual products, business units and so on.
-starting point is the previous year or period data.
-advatages of using hunch
what is the Delphi method?
would involve getting a group of market experts to provide an opinion on the forecasting task, e.g to estimate future sales growth in a market.
method would involve a series of steps where the experts does give a confidential opinion on the task and then revise their forecasts based on the submission of each experts to the group.
-aim is to reach a consensus forecast.
Delphi technique does use expert opinion to predict the future what are its advantages?
experts could reconsider their judgements after reading feedback from other members of the expert group.
it is flexible enough to be used in a variety of situations and be applied to a range of complex problems.
precipitant’s have time to think through their ideas leading to a better quality of response.
- it would then create a record of the expert groups responses and ideas which could be used when needed.
what are the disadvantages of using the Delphi technique
-does all depend on the content and the structure of the questionnaires.
-would assume that experts are willing to come to a consensus and allow their opinions to be altered by the views of other experts
-expert panels do often loose members because of boredom, and disillusionment with the process.
-monetary payments to the experts could lead to bias in the result of the study.
-method would be more than likely to require a substantial length of time to complete and could be costly in terms of the researchers time.
what is brainstorming?
-they will get together employees who have experience of the market and bounce ideas of each other in order to determine their collective best estimate of what is likely to happen in the future.
-use could be made of previsions cycles of similar products.
what are is sales forecasting qualitative advantages?
- dealing with wide issues than just numbers, such as forecasting where there could be a shift in popularity from mountain bikes to road bikes.
advantages - would involve people knowledge of the market and uses their intuition and hunches. which could provide a greater insight into future trends than statistical data.
- it could also consider known future conditions.
what are the disadvantages of using sales forecasting?
-would involve people perception of what could happen, which could be biased to further their own ends.
-often experts do disagree completely.
quantitative methods, are used when historical data is available. different models could be sued to forecast future events. they do rely heavily on data and on objective. what are the different methods that could be used?
- time series analysis would use evidence from past sales record to predict future sales pattterns. business could look at its sales over the last few year and work out what is happening.
-figures could reveal a upward trend that is encouraging, or a downward trend that is worrying.
-in reality sales are likely to have fluctuated both up and down over a period of time.
there are several methods of time series analysis that could be used what are they?
seasonal analysis,
sales are measured monthly or weekly to examine the seasonality of demand.
for example the sales of ice cream would be a lot higher in the warmer seasons.
trend analysis it would focus on long term data that has been collected over a number of year. the objective would be to determine the general trend of sales rising falling or stagnant.
cycle analysis, long term figures are used but now objective would be to examine the relationship between demand levels and economic activity. for example by asking the question what is the relationship between demand for the products or products and the stage in the economic or business cycle.
random factor analysis
it does attempt to explain how unusual or extreme sales figures occur. for example if sales of ice cream does double for a two week period could it be explained by weather conditions. It does attempt to provide explanations for unusual or abnormal sales activity.
how do you calculate a three month moving average?
take three adjacent figures for each month and divide by three.
what are the advantages to a company that is using a three-point moving average?
-would help the business to plan
-could help the financial planning, including cash flow management
-would help with the production planning e.g. ordering in the correct number of raw materials.
-human resources planning, getting the right number and type of staff in the job that are needed.
-it could motivate managers to reach targets
what are the disadvantages of using a three point moving average?
-it does use information from the past and does not consider what could happen in the future (such as compeitor launching a new product or if the economy could go into recessions, supplies of raw material could be disrupted).
-it could be only useful when sales have been stable with then no major upsets.
- it is only accurate as the information collected
-it does assume that consumers would maintain their buying habits. a new business or company could emerge that does offer the same or better products causing sales forecasting to change and therefore the three point average.
- does no account for qualitative issues.
what is depreciation?
depreciation is the wearing out, using up or other reduction in the useful economic life of a fixed asset whether arising from use, passing of time or absolence through either change in technology or demand for goods and services produced by the asset.
what does depreciation involve?
it does involve allocating the cost of the fixed asset over its useful life. to calculate depreciation charge for an accounting period factors such as
-the cost of the fixed asset
-the estimated useful life of the asset
-the estimated residual value of the asset
are all relevant
what is the useuful life of a fixed asset?
an asset could be seen as having an economic (useful) and physical life.
-a lot of fixed assets would suffer physical deterioration through usage and the passage of time.
-despite care and maintenance could be seen as extending its physical life it would eventually reach a condition where the benefits had been exhausted.
- a business could however not wish to keep an asset until the ends of its physical life, there may be a point when it become uneconomic to continue the use of the asset.
- economic life of the asset would be determined by factors such as technological process and change in demand.
what is the residual value of the fixed asset?
at the end of the useful life of a fixed asset the business would dispose of it, and any residual from the disposal will represent its residual value.
what is the calculation for depreciation?
depreciation = original cost - residual value/ expected life (years)
how do you work out the net book value?
net book value = original cost - depreciation
the resultant figure would tell a business how much value the product does depreciate by each year. the business could then work out the net book value of an asset by
what are the advantages of depreciation?
-over time machines do become won out and obsolete. if they were valued in the company books at their cost price it would have put a false picture of their true worth and it would cause the business in general to be overvalued.
if it was known that the business was window dressing its accountants in such a way that it would affect the company’s reputation and could affect their ability to borrow money.
by depreciating the value of their machinery the company is in a better position to appreciate its real value and
there is also a legal requirement to devalue fixed assets in order to reflect their true worth.
what is the gross profit margin?
gross profit margin is the percentage of revenue that is turned into gross profit.
what does it indicate?
it would indicate how effectively a company is at turning their revenue into gross profit.
what is the net profit margin?
net profit margin is the percentage of revenue that is turned into net profit
what does indicate?
how effectively a company is at turning their revenue into net profit
how could net profit/ gross profit margin be changed reduced, or improved? and what has caused the potential movement?
a change in expenses or a change in revenue could cause the movement. More expensive cost of sales could cause a decline in revenue.
how do you calculate gross profit margin?
gross profit/ sales revenue x 100
how do you calculate the net profit margin?
net profit/ sales revenue x 100
what is return on capital employed?
it does tell us what returns (profits) the business has made on the resources available to it (investment)
how do you calculate roce?
net profit/ capital employed x 100
how could you improve roce?
you could either
-improve operating profit without increasing in capital employed
-maintain operating profit but reduce the value of capital employed
what is current ratio?
current ratio does indicate whether the business could pay debts due within on year out of the current assets. the current ratio does reveal how much cover the business has for every £1 that is owned by the firm.
how is current ratio calculated?
current ratio = current assets/ current liabilities
answer is X: 1
what is an ideal current ratio, and what does it suggest?
an current ratio of 1.5-2.0 is encouraging it would suggest that the businesses has enough cash to be able to pay its debts but not too much finance tied up in current assets that could be re invested or distributed to shareholders.
what does a low current ratio suggest and what is a low current ratio?
a low current ratio does suggest that the business is not well placed to pay its debts, it could need to raise extra finance, extend it time it takes to pay creditors.
why should a business not be fussed about a current ratio?
no such thing as an ideal current ratio. all different business and industries work with different levels of cover. however a ratio of less than one is often a cause for concern particularly if its persist for any length of time.
how could a current ratio in a business be improved?
would need to turn short term debt into long term debt.
what is acid test ratio?
acid test ratio adjust the current ratio to remvoe the value of stocks from the current assets total-stocks are assumed to be the most illiquid part of current assets it is harder to turn them into cash quickly.
how do you calculate acid test ratio?
acid test ratio = current assets - stocks/ current liabilities
answer is always to X:1
what is a good acid test rash and would does it indicate in a business?
an acid test ratio of over 1.0 is generally good news the business should be able to pay its debts even if it cannot turn stocks into cash. however the value of stocks a business does need to hold would vary considerably from industry to industry. e.g a supermarket would have very poor atr and high creditors, but creditors would not worry about large businesses like these not paying their debts.
what is gearing ratio?
gearing is the proportion of finance that is provided by debt relative to the finance provided by equity ( or shareholders).
it is a measure of liquidity but does also focus on the long term financial stability of a business
what is considered a good level of gearing in a business?
the higher the level of borrowing the higher risks there are to the business. a business with a gearing ratio of more than 50% would traditionally said to be highly geared.
something between 25-50% would be considered normal for a well established business that would be happy to finance its activities using debt.
why is not necessarily a bad thing to have a high gearing ratio however?
financing a business through long term debt is not necessarily a bad thing. long term debt is normally cheap and it does reduce the amount that shareholders do have to invest in a business.
how can gearing be reduced?
gearing could be reduced by
issuing more share capital
repay long term loan
retain more profit and don’t pay dividends
A mature business that does produce strong and reliable cash flows could handle a much higher level of borrowing than a business where the cash flows are unpredictable and uncertain.
how could gearing be increased?
could
-borrow to fund growth
-turn short term debt into long term debt
-buying back shares
what is a fixed asset?
a fixed asset is a asset of a business that is intended for continuing use rather than a short term temporary current asset such as stock. example of fixed asset would include land and buildings, plant and machinery, fixtures and fittings, motor vehicles and IT equipment.
what is a current asset?
Current assets are the assets a business owns which are either cash, cash equivalents, or are expected to be turned into cash during the next twelve months.
what is a long term liabilities?
Long-term liabilities are the monies the business has borrowed for a period of more than a year – mainly bank loans.
what is share capital?
Share capital is the money invested in the business by the owner
what is a current liabilities?
Current liabilities are what the business owes in the short run
what is a creditor?
Creditors – money owed by the business in the short term (suppliers who are owed money by the business are known as “trade creditors”).
what is stock?
Stocks – finished goods, work in progress and raw materials (note: you may also see stocks called “inventories”).
what is shareholder funds?
Shareholder funds are the share capital and reserves added together.
what is capital?
Capital is the amount of long-term money put into the business to buy assets. Main forms of capital: owner’s money (share capital) and long term bank loans.
what is window dressing?
window dressing is the legal method of manipulating accounts to present a financial picture which is to the benefit of the business and improves the appearance of the company’s financial statements.
where is it used or where is it particularly common?
it is common when a business had a lot of shareholders so the management can give the appearance of a well run company to investors that probably do not have much day to day contact with the business.
-could be used when a company want to impress a lender in order to qualify for a loan.
- or if a business is closely held the owners would be usually better informed about company results, no reasons for anyone to apply window dressing to financial statements.
why is window dressing used?
-to attract investments
-to please shareholders
-to make it easier to sell the business
what are the ways that a business could window dress?
cash -postppone paying suppliers so that the period end cash balance does appear higher than its should be
sales- sales manipulation offering commission to sales staff recording sales as revenue early
fixed assets -undervaluing the cost of depreciation
fixed assets -revaluing any fixed assets e.g property
fixed assets- sell off those fixed assets with large amounts of accumulated depreciation associated with them , so the net book value of the remaining asset does appear to indicate a relatively new cluster of assets.
expenses- would reduce any unnecessary costs e.g. withhold supplier expenses, so that they are recorded in a later period
sales, would allow future predicted inflation
current assets, boosting liquidty e.g sales and lease back
current assets/ creditors running just in time stock control
short term solutions hiding long term problems
what are the problems with window dressing?
- all accounts are unreliable (evaluation) trust issues, pr disasters
-operational difficulties cut back trade credit
-could be unable to sell an overvalued asset
-inflation could be different to predications
-all short-term solutions possibly hiding long term problems
what is a potential non financial method of performance?
market share
- would outline the dominance a business has in the market.
- business could have set objective to increase market share by a certain percentage (e.g 10% over 5 yers)
- the greater the market share does mean that the business could influence the market rather than having to follow others.
what is another non financial method of performance?
sales targets
-increasing sales does not neccesarily mean greater profit however it is an indicator of a growing business and does go hand in hand with icnreasing market share
- a business which is entering a new market/ diversifying could have sales targets as their number one objective to ensure that they build up a strong customer base
- sales equals to cash inflow
what is another non financial method of performance
-increasing productivity does mean that a business is using up there resources more efficiently.
-should result in falling average costs and improve quality
-employees would be motivated and satisfied within their jobs.
-productivity is also a useful way of analysing whether or not new investment into capital equipment or training have worked.
what was another non financial method of performance?
environmental impact
-is the business controlling their externalities?
- if not then this could then impact upon the consumer perception of the company’s ethics.
-does the company have strategy in place?
-how are they affected by government regulation?
what is another non Finacial method of performance?
surely a succesufl business is one that does meet the needs and want of their customer.
- a customer could be a paying customer supplier, a retailer or a wholesaler depending on the market analysed.
-all staff training and development would usually result in improved customer service.
-investments into new technology, the use of tqm methods and the continual market research should all help to improve the quality of the products sold.
what are the advantages of the Delphi technique?
advantages include
experts can reconsider their judgements after reading feedback from other embers of the expert group
it is flexible enough to be used in a variety of situations and be applied to a range of complex problems
pacipitants have time to think through their ideas leading to a better quality of response
the Delphi method does create a record of the expert groups responses and ideas which can be used when needed
what are the disadvantages of using the Delphi method
- it does assume that experts are willing to come to a consensus and allow their opinions to be altered by the views of other experts
-monetary payments to the exerts may lead to a bias in the results of the study
the method would more than likely require a substantial period of time to complete and could be costly in terms of the researchers time.
expert panel would often loose embers because of boredom and disillusionment with the process.
all does depend on the content and structure of the questionaries
what are the advantages of budgeting?
- a means of controlling income and expenditure
-regulate the spending of money and highlight losses, waste and efficiency.
-act as a review and allow time for corrective action to take place
-they allow delegation without loss of control- subordinates can be set their own targets
what are the advantages of budgeting?
-they help in the coordination of a business and improve communications between different sections of the business.
- budgets provide clear targets to be set and should help employees to focus on costs
-can act as a motivator for staff if budget is met.
what are the cons of budgeting?
-they can be time consuming for mangers in small business especially for those who are not particularly numerate.
-some peroneal can resent having to meet budget targets that they have had no part in constructing. poor motivation and missed targets can result.
-if the actual figures are very different from the budgeted ones the budget can loose its significance.
what are the cons of budgeting?
-the budget must not be too flexible as business opportunities might be missed.
-poorly constructed budgets can lead to poor decision making.
what is a budget variance?
a variance is any unplanned change from the budgeted figure, they occur when an actual figure for sales or expenditure differs from the budgeted figure. variance can be favourable or adverse.
what is a favourable variance exists?
when the difference between the actual and budgeted figures will result in the business enjoying higher profits than shown in the budget for example when
-expenditure is less than expected
revenues are higher than expected
what is an adverse variance?
it does occur when the difference between the figures in the budget and the actual figures will lead to the business profit being lower than planned for example when
-expenditure is higher than expected
-revenues are lower than expected
what is a zero budget?
-does involve mangers starting with a clean sheet where they must justify all expenditure
what does zero budgets do?
-it improves control
-help with the allocation of resources
-limits the tendency for budgets to increase annually with no real justification for the increase
-reduced unnecessary costs
-motivate mangers to look at alternative options.
what are the reasons for change in the favourable variances?
-an effective bonus scheme for salesman
-a successful advertising campaign
-favourable weather
-the demise of a competitor
what is the reasons for change in the variances in adverse sales variance?
-the successful activities of competitors
-they may have lost an important contract
-ineffective advertising
-logistical problems that meant the stock did not arrive with the customer on time.
-bad weather
-general economic conditions (recessions)
-changes in consumer tastes
what has favourable cost variances been caused by in factors
-workers may have been better trained/ motivated leading to improved labour productivity.
-reduced costs of imported components due to a strengthening of sterling
-raw material costs have fallen
why had adverse cos variance change, what factors have changed it?
-a strike by workers
-bad weather in the growing region for crops such as sugar or coffee
-a devaluation of sterling
-unexpected price rises from suppliers
what is a budget?
a financial plan for the future concerning the revenues and costs of a business.
-is a financial plan
-sets out financial targets
-is expressed in money
-contains agree plan for action over a given period expressed in numerical terms
