Financial Performance

Question 1

Value of setting financial Objectives

Answer 1

Act as a measure of performance
provide targets which can be a focus for decision-making
Potential investors may assess the viability of business

Question 2

Cash flow

Answer 2

diff between the actual money a business receives and the actual money it pays out

Question 3

Profit

Answer 3

Difference between all sales revenue and expenditure

Question 4

Such problems of having cash flow problems can occur due to

Answer 4

having large amounts of inventory
Having sales on long credit periods
Using cash to purchase fixed assets

Question 5

Revenue

Answer 5

starting point to creating a budget. Budgeted revenue based on increasing revenue by 5% per annum. objectives set depend on the type of market and economy

Question 6

Costs

Answer 6

operate in a highly competitive environment, facing pressure on costs. Cost minimization - involves trying to achieve the lowest possible unit cost of production.
Variable costs can change when the Business gets larger, so negotiate with the supplier for a better price.

Question 7

Profit

Answer 7

Best source of capital for investment in the growth of business
attract further funds from investors by the possibility of high returns on their investment
Business needs to make a profit to reward its owners for putting money into the enterprise

Question 8

Setting cash flow objectives such as

Answer 8

Targets for monthly closing balances
reduction of bank borrowing to the target level
reduction of seasonality in sales
extensions of business credit period to pay suppliers
targets for achieving payment from customers

Question 9

Gross profit

Answer 9

sales revenue - direct cost of production (materials and direct labour)

Question 10

Operating profit

Answer 10

Sales revenue - all costs of production
or Gross profit - expenses ( marketing and salaries )

Question 11

Profit for the year

Answer 11

Operating profit + other income - other expenditure
it includes interest payment or tax to be paid or other income such as interest received or money received from sales of assets

Question 12

Capital Expenditure

Answer 12

Money spent on fixed assets such as buildings and equipment - represents long-term investment into business

Question 13

Objectives for investment depends on and when it can occur

Answer 13

The investment will occur:when business first set up and as the business grows and develops
Objectives depend on :
corporate objectives : growth
Type of business
state of economy
market in which businesses operate in

Question 14

Return on Investment

Answer 14

Profit from Investment in the first year /capital invested * 100
any returns or profits would be forecast , any predictions made may be influenced by a mangers own bias towards a particular investment

Question 15

Capital spending

Answer 15

competitive in technological markets , the key to long-term success is to generate enough profit margins to fund high levels of investment spending on R&D or capital equipment enable quality and efficiency of production to rise

Question 16

Cost Minimisation

Answer 16

lowering costs increases profitability. reducing fixed costs as an example. this is done during survival

Question 17

External Influences on Financial Objectives

Answer 17

Competitor actions - operate within a competitive environment and react according to competitors. competitors are launching a marketing campaign, and price cuts.
Market forces - fashion changes over time, and businesses must keep up with changes. online shopping increased therefore leading to the closure of many retail outlets
Economic factor - the recession of 2008 led to financial targets begin missed, and increasing growth lead to better performance .
Technology - easy monitoring of financial data. intro to tech leads to greater efficiency and improved performance, likely to have cost in the short term

Question 18

Internal influences

Answer 18

Corporate objectives - the objective of growth improves financial performance in the long term but might lead to a decline in the short term as more money is used to finance the goal
Resources available
Operational factors - achieve financial targets limited in short term by physical capacity of a business

Question 19

Income Budget

Answer 19

Forecasted earnings from sales. based on the results of market research in new business. established business call upon past trading records. normally drawn up for next financial year.

Question 20

what’s included Included in the income budget

Answer 20

Cash sales
Credit sales
Total sales
Expenditure - expected spending of a business
Purchases of raw materials and
components
Interest payments
Wages and salaries
Marketing and administration
Other costs
Total costs
Profit/(loss)

Question 21

why do Businesses set Budgets?

Answer 21

An essential element of the business plan. A bank is unlikely to grant a loan without evidence of form of financial planning
Help whether to go or not go ahead with a business idea
help with pricing decisions. if a large loss is forecast, a business may decide to adjust the price

Question 22

Difficulties in setting budgets

Answer 22

No evidence is available for a new business or an existing business to enter a new market. no trading records to show the level of sales
Businesses may lack the experience to estimate the costs of raw materials
Competitors respond to actions of businesses by cutting prices or promo. affect the sales income of the business and receive less income than forecast Expenditure on promo has to increase, increasing cost.

Question 23

Variance analysis

Answer 23

difference between planned activities in the form of budgets and actual results achieved

Question 24

Favorable and Adverse variances

Answer 24

Favorable (positive ) variance occurs when costs are lower than forecast or profits/revenues higher.
Adverse variance - costs are higher than expected / revenues lower than anticipated

Question 25

Possible responses to Positive variance

Answer 25

might occur due to good budgetary control or by accident: due to rising market prices
✚ to increase production if prices are rising, giving increased profit margins
✚ to reduce prices if costs are below expectations and the business aims to
increase its sales
✚ to reinvest into the business or pay shareholders higher dividends if profits
exceed expectations

Question 26

Possible responses to negative prices

Answer 26

occur due to inadequate control or outside firms control such as rising raw material costs
✚ to reduce costs (e.g. by buying less expensive materials)
✚ to increase advertising in order to increase sales of the product and
revenues
✚ to reduce prices to increase sales (this relies on demand being price elastic)

Question 27

Possible interpretations on variances on why it became positive or negative

Answer 27

✚ A favourable production material variance could be generated from using
lower-quality raw materials, which in turn could manifest itself as a drop
in sales.
✚ Similarly, an adverse cost variance may occur because sales are higher
than forecast and the business has incurred extra costs in supplying
customers’ demands.

Question 28

Benefits of budgets

Answer 28

✚ Targets can be set for each part of a business, allowing managers to identify
the extent to which each part contributes to the business’s performance.
✚ Inefficiency and waste can be identified, so that appropriate remedial
action can be taken.
✚ Budgets make managers think about the financial implications of their
actions and focus decision making on the achievement of objectives.
✚ Budgeting should improve financial control by preventing overspending.
✚ Budgets can help improve internal communication.
✚ Delegated or devolved budgets can be used as a motivator by giving
employees authority and the opportunity to fulfil some of their higher-
level needs, as identified by Maslow (see p. 110). At the same time, senior
managers can retain control of the business by monitoring budgets.

Question 29

Drawbacks of budgets

Answer 29

✚ The operation of budgets can become inflexible. For example, sales may be
lost if the marketing budget does not change when competitors implement
major promotional campaigns.
✚ Budgets have to be accurate to have any meaning. Wide variances between
budgeted and actual figures can demotivate staff and waste the resources
used to prepare the budgets.

Question 30

Cash flow forecast?

Answer 30

The central part of a business plan for a new business

Question 31

What does it include

Answer 31

Receipts - expected total month by month receipts are recorded
1 Sales cash
2 Sales credit
3 Total cash in (1 + 2)

Payments- expected monthly expenditure by item is recorded
4 Supplies
5 Wages
6 Fuel
7 Electricity
8 Heating
9 Rates
10 Mortgage payment
11 Interest on loan

12 Total cash out (4 + 5 + 6… + 11) 7,450
13 Net cash flow (3 – 12)
14 Opening bank balance
15 Closing bank balance (14 + 13) - closing balance at end of one month becomes the opening balance of the next month

Question 32

Constructing Breakeven Chart

Answer 32

X axis - output and y-axis - costs / revenues in pounds
Breakeven point - sales revenue = total cost
mark on Selected operating point - actual or forecast breakeven level of output
margin of safety - difference between SOP and break-even level of output

Question 33

Contribution

Answer 33

Difference between Sales revenue and variable cost
calculated per unit : Sales price per unit - variable cost per unit

Question 34

Total contribution

Answer 34

Unit contribution * output
Profit + fixed cost = total contribution
at break even , no profit is made so value of contribution is equal to fixed cost .

Question 35

Breakeven

Answer 35

Fixed costs/contribution per unit

Question 36

what does it mean at break even , Conntribution = fixed cost

Answer 36

below break even point , any contribution from sales goes towards fixed cost and above break-even it goes towards profit

Question 37

How does an increase or decrease in selling price affect Break-even output

Answer 37

Increase selling price - revenue line pivots upwards - Break even reached at lower level of output - Fewer sales needed to reach brek even as each sale generates more revenue
Decrease in selling price - Revenue line pivots downards - Break even point reached at higher level - Each sale will earn less revenue for business and more sales required to break even

Question 38

How does an increase or decrease in Fixed cost affect Break-even output

Answer 38

Rise in FC- parallel upwards shift and total cost lines - Break even occurs art higher output- more sales required to break even because business has to pay higher costs be4 starting production
Fall in FC - parallel downards shift in FC and TC lines - smaller output required to break even - business faces lower cost , fewer sales needed to break even

Question 39

How does Rise or Fall in VC affect break even

Answer 39

TC line pivots upwards - Higher output needed to break even - each unit of output costs more to produce so greater no of sales needed to break-even
Fall in VC - Tc line pivots downwards - lower level of output needed to break-even - every unit of production is produced cheaply so less sales to break-even

Question 40

Benefits of Break-even Analysis

Answer 40

✚ Starting a new business. A business can estimate the level of sales
required before it would start to make a profit. From this it can see
whether or not the business proposal is viable. The results of market
research are important here.
✚ Supporting loan applications. A business will be unlikely to succeed in
negotiating a loan with a bank unless it has carried out a range of financial
planning, including breakeven analysis.
✚ Measuring profit and losses. In diagrammatic form, breakeven analysis
enables businesses to tell at a glance what their estimated level of profit or
loss would be at any level of output and sales.
✚ Modelling ‘what if?’ scenarios. Breakeven analysis enables businesses to
model what will happen to their level of profit if they change prices or are
faced with changes in costs.

Question 41

Drawback of Break-even

Answer 41

✚ Sales revenue assumes that all output produced is sold and at a uniform
price, which is unrealistic.
Assuming all output is sold . in time of low demand , firm may have difficulty in selling all that it prodcues

Question 42

Payables

Answer 42

Money owned for goods and services that have been purchased on credit

Question 43

Receivables

Answer 43

money owned by business or customers for goods or service purchased on credit

Question 44

The analysis of this cash flow will enable business to

Answer 44

✚ forecast periods of time when cash outflows might exceed cash inflows
and take action (e.g. arrange a loan) in order to avoid the business being
unable to pay bills on time
✚ plan when and how to finance major items of expenditure (e.g. vehicles or
machinery), which may lead to large outflows of cash
✚ highlight any periods when there may be cash surpluses that could be
used elsewhere
✚ assess whether an idea will generate enough cash to be worthwhile
putting into action
✚ give evidence to lenders (e.g. banks) that any loans given can and will be
repaid

Question 45

Internal source of Finance

Answer 45

retained profit - profit not paid to shareholders and kept for future investment . only access to this if its profit-making and has no interest or dividend payment attached to it
Sale of Assets - When Business sells assessts it no longer requires, such as machinery or land . This sometimes raise large amounts but has to be sure these assets not required in the future

Question 46

External source of Finance

Answer 46

Equity - money provided by owners or shareholders. not paying them back or interest is on it paid. if a shareholder wishes to regain the money, sell sharts to someone else through a stock exchange.
Loans - money raised from the creditor - loans have to be paid back and interest payments to be made

Question 47

Other sources of long term external finance include

Answer 47

Venture capital - small and medium-sized business that struggle to raise money from traditional sources . provide funds as loan / in return of a shares in a business
Mortgages- loan granted for purpose of buying land or buildings
Crowdfunding - raising finance from large no of people who each contribute a small amount of money

Question 48

Short term sources of Finance

Answer 48

Overdraft - The Bank allows businesses to overspend on their accounts up to the agreed limit. easy to arrange and flexible form of finance . Expensive but interest will be charged on amounts withdrawn
Debt Factoring - Businesses sell their bills that have not been paid to financial institutions in order to access this money upfront. A business receives 80% of the sum owed immediately.
Trade credit- when business receives materials but pays them at later date

Question 49

Advantages and on sources of Finance

Answer 49

Source
Advantages
Retained
profit
✚ No interest to pay.
✚ Does not have to be paid back.
✚ No dilution of shares.
Sale of assets
✚ No interest to pay.
✚ Does not have to be paid back.
✚ No dilution of shares.
Equity
✚ No interest to pay.
✚ Does not have to be paid back.
Loans
✚ No dilution of shares.
Overdraft
✚ Quick and easy to set up and very flexible.
✚ Interest paid only on amount overdrawn.
Debt
factoring
✚ Immediate cash.
✚ Improves cash flow.
✚ Protection from bad debts.
✚ Reduced administration costs.
Trade credit
✚ Eases cash flow.

Question 50

Disadvantages of source of Finance

Answer 50

Retained profit
✚ Shareholders may have reduced dividends.
Sale of assets
✚ Once sold, gone forever.
Equity
✚ Might upset existing shareholders.
Loans
✚ Set maturity date.
✚ Interest payments higher than for a loan.
Debt Factoring
✚ Expensive.
✚ Customer relations may be affected.
Trade credit
✚ If late paying, can damage credit history.

Question 51

Cash flow problems

Answer 51

Poor management: failure of not forecasting and monitoring cash flow and chasing up customers who haven’t paid lead to lower inflows and cash shortages.
Giving too much credit: the firm offers trade credit , and gives customers time to settle their accounts. attracts customers but slows business cash inflows.
Overtrading: business expands rapidly without planning how to finance it. growing business must pay for material and labour before receiving cash inflows from sales

Question 52

Improving cash flow

Answer 52

Factoring: enables businesses to sell outstanding debts to debt collector. The business receives 80% of value of debt but this reduces profit margins but they don’t have to wait .
Sale and leaseback: owner of assets sells it and leases it back. short-term boost to business finances, as the sale of the assets generates revenue.
Improved working capital: working capital is the cash available to business for its day to day operations .

Question 53

How can working capital be improved by

Answer 53

✚ selling stocks of finished goods quickly, prompting cash inflows
✚ making customers pay on time and offering less trade credit (although this
may damage sales)
✚ persuading suppliers to offer longer periods of trade credit, slowing cash
outflows
Other possibilities are:
✚ stimulating sales, by offering discounts for cash and prompt payment
✚ selling off excess material stocks

Question 54

Methods of improving profit and profitability

Answer 54

Increase in Prices: increase revenue without raising total costs. increase in price might cause a fall in sales leading to a loss in profit. depends upon the price elasticity.
Cutting costs: increase profit margins possibly at the expense of quality. this reduces the volume of sales and firm’s reputation
Using capacity as fully as possible: not utilizing a productive capacity, its profits will be lower than they could be. offering incentives to customers would increase profit.
Increasing efficiency: avoiding waste in the form of poor quality and unsaleable products, and using minimal resources to make products are all ways of improving the efficiency of a business.

Question 55

Difficulties in improving cash flow

Answer 55

✚ Factoring. The profit margin is reduced due to the cost of factoring. In
addition, customers might become concerned that their supplier has cash-
flow difficulties.
✚ Sale and leaseback. The asset is removed forever and rent now has to be
paid.
✚ Working capital control. Customers may be put off by reduced credit
periods and suppliers may be unwilling to extend credit periods.

Question 56

DIfficulties in improving Profit

Answer 56

Increasing prices. This may reduce sales and revenue and attract criticism
from customers.
✚ Cutting costs. This is likely to result in a reduction in quality if inferior
raw materials are used. It could also mean job losses and upset labour
relations.
✚ Use capacity fully. This may cause problems in matching supply with
demand. It could result in price reductions and lower revenues.
✚ Increasing efficiency. This may result in redundancies if technology is
introduced.