finance: topic 5 Flashcards
what is total revenue
total revenue is the sum of money a business earns from the sales it makes
it is a measure of success
how can you increase revenue
decrease price - ask if the potential increase in sales and profit outweighs the cost of advertising and price reduction
increase the price - works only if customers won’t switch to a cheaper competitor (brand loyalty)
equation for revenue
total revenue = total quantity sold x price of products
what’s the extended magic formula?
sales - variable costs = gross profit - fixed costs = net profit
how do you calculate ARR?
- total net profit
- average profit per year (NP/years)
- average profit as a proportion of the original investment (x/original investment cost x 100)
define ARR
MOMACPILI
method of measuring and comparing the profitability of an investment over the lifetime of an investment
what are the advantages of using ARR
- informs decisions for potential investments
- helps with planning long term
- can compare investments
- can decide if an investment is worthwhile
- simple profitability calculation
disadvantages of using ARR
- there could be changes in the cost/availability of raw materials
- based on quality of primary+secondary market research
- the market could change
- its a prediction/forecast and therefore not 100% reliable
where is the break even point on a graph?
where the sales revenue and total costs cross
benefits of calculating the break even?
- helps to secure finance
- can set short/medium/long term goals
- shows margin of safety
- helps decide prices
- helps analyse costs + relationship between fixed and variable
- can run ‘what if’ scenarios
what is the margin of safety?
the difference between the current sales and the break even point
limitations of calculating break even?
• forecast so not 100% reliable
eg. competition moving closer could change it, affects sales
• suppliers could change prices
• promotional offers
• not reliable when selling millions of products (eg amazon)
what is ‘Total Inflows’
the total cash that flows in each month
what is ‘Total Outflows’
the total cash that flows out in the month
how do you calculate Net Cash Flow?
Net Cash Flow = Total Inflow - Total Outflow
how do you calculate Closing Balance?
Opening Balance +/- Net Cash Flow = Closing Balance
how do you get the Opening Balance?
it’s last months Closing Balance
what’s the difference between cash and profit?
profit is the money left when costs are taken away from sales revenue and can be a prediction
cash is the money has in the bank or on its premises
consequences of a shortage of cash
cant pay suppliers —> cheaper supplier —> reduce quality —> reduce sales and profit
cant pay suppliers —> bad reputation—> cant get raw materials —> legal action
lack of cash —> cant pay bills —> bankruptcy —> loss of assets (depends) —> loss of business
restructure —> less staff (flat vs tall) —> less morale and motivation
don’t pay salary/wages —> legal action
what is the result of negative cash flow?
the business doesn’t have liquidity and can’t pay any short term bills
what’s the function of the finance department?
- managing and planning budgets
- managing and planning savings and growth, financial forecasts
- collects money +/ payment, sends out bills
- in charge of payroll, deals with tax (20% on all profit)
- supports ALL other functions
importance of finance+the finance department
finance informs decision making
the finance department helps managers at all levels to make tactical and strategic decisions
list the sources of finance
LAPTOPSCC
loan, sale of assets, retained profit, trade credit, overdraft, new partner, share issue, owners capital, crowd funding
