final precise p2 Flashcards
What are the difficulties of sales forecasting?
- Volatile customer tastes and preferences
- Can be subjective and can reply on the experience of the manager within the business
- Volatile markets
What is the purpose of budgeting?
Motivation - Provides workers with targets
Planning - Forces management to plan for the future
Efficiency - helps control spending
What is a statement of comprehensive income?
A financial document showing a company’s income and expenses over a set time period. Used to calculate gross, operating and net profit.
What does the Acid test ratio mean?
How quickly a business can pay off its liabilities.
A high acid test indicates the company can meet immediate payments
Acid test < 1 - Not good
Acid test >= 1 is good
How can you improve liquidity?
Use of overdraft facilities - good to sort short term
Negotiate additional short term or long term loans
Reduce personal drawings from the business
Only make essential purchases - eg zero based budgeting
Trade credit -
Sell off stock -
Introduce fresh capital - eg shareholders
Encourage cash sales - encouraging customers to purchase goods in cash and not in credit
Sale and leaseback - selling a fixed asset and then leasing it back afterwards
What are some examples of cash flow problems?
Overtrading Investing too much in fixed assets Allowing too much credit Over-borrowing Seasonal factors Unforeseen expenditure (I.e. equipment breakdowns) External factors Poor financial management
What is liquidity?
Liquidity refers to the day to day cash flow
What is overtrading?
When a business does not have enough cash to support its production and sales, usually because its growing too fast
What is administration?
When a failing business appoints a specialist to rescue the business or wind it up
What are the advantages and disadvantages of under-utilisation?
+Allows the business to cope with sudden increase in demand
+Workers won’t be over worked
- Fixed costs can be high
- Business won’t be making the most of its resources
- Workers may feel insecure in their jobs
What are the ways of improving capacity utilisation?
Increased sales - Promote to encourage sales
Increased usage - Eg train companies are busy during peak hours and less busy during off peak hours
Outsourcing -
Redeployment- employees getting new job roles in the same company
What is mothballing?
Leaving machines, equipment or building space unused but maintained which can be brought back into use if necessary
How does the business cycle effect business?
Output - Increase output during a boom, decreased output during recession
Profit - Increased profits during a boom
Business confidence - high confidence during the boom and recovery stage
Employment - employees more during a boom
Business start ups/closures - more business start ups in a boom and closures during a recession
What is the effects of economic uncertainty on the business environment?
Decision making - unpredictable behaviour
Unexpected events -
Business confidence -
How does competition policy affect businesses?
Positive:
Designed to promote competition which firms can benefit from. Eg lower barriers of entries may make it easier for new businesses to get into the market
May help benefit the economy as it encourages innovation and efficiency. This could encourage businesses to develop new products, reduce costs and make progresses into overseas markets. This could help generate more revenue and profit from exports. This could also raise income and employment.
Negative:
Can slowdown the process of mergers and takeovers which can cost the businesses a lot of money.
What is the impact of legislations on businesses?
Can increase costs, limit competitiveness, damage business reputation
Can create opportunities for some businesses and encourage innovation.
What are Porter’s Five Forces and what is it used for?
-It’s a tool used to analyse the competitiveness of a business environment.
Rivalry within the market, Bargaining power of suppliers, Bargaining power of buyers, Threats of substitutes, Barriers to entry
Threats of substitutes (What makes competition fierce? Key problems? Business options?)
Threats of substitues is high if:
- Alternative products exists
- Alternative prices fall
- Customers can easily switch to substitues
Key Problems:
- Buyers have high bargaining power
- Competiton exists outside of the market
Options for Businesses to consider:
- Develop a USP
- Lower prices to attracts customers
- Forward integration if buyer is a business
Why might a business want to calculate a seasonal variation when predicting future sales figures?
-To provide more accurate predictions
What is time series data?
A tool used to help a business work out trends to predict the future
What are the 4 main variables in time series data?
- Trends
- Seasonal fluctuations (Eg Xmas)
- Cyclical fluctuations (Eg repeating patterns)
- Random fluctuation
What is the gearing ratio formula and what does the output tell us?
(non-current liabilities/ Capital Employed) x 100
Gearing > 50%
-vulnerable to increases to interest rates
Gearing < 50%
- May be able to borrow more
- Business isn’t taking enough risk
What is the Return on Capital Employed (ROCE)?
It tells us the Return on capital employed. Relates profit to the size of the business
What is the Return on Capital Employed (ROCE) formula and what does the result mean?
(Operating Profit/ Capital employed) x 100
- The higher the percentage the better
- Identify trends
- Low quality profit (eg selling random assets or benefiting from a trend) might boost ROCE and be miss leading
- Needs to compared to interest rates (would saving in the back be more profitable than investing in a business)
What are the limitations of ratio analysis?
The basis for comparison - less reliable over times when comparing
The quality of financial accounts - eg when inflation is high are asset values inflated accordingly
Limitations of the balance sheet
Qualitative information is ignored - eg change in leader ship
Other differences - eg different accounting methods or accounting methods can be misleading for investors
Window dressing - Making the ratio analysis look better than it is
What is the formula for capital employed?
TA - TL
(Net Assets)
Or
Non-Current liabilities + Total Equity
Why are shareholders interested in the statement of financial position?
- Shareholders may see how their investment has been spent
- Suppliers and creditors will be interested to see whether the business will be able to pay its debts
- Managers may use it to analyse liquidity and asses the level of risk associated with debt
