Money Flashcards
What is revenue
The money that comes into a business from sleeping services or products
Price x quantity
What are fixed costs
Do not change in relation to output
What are variable costs
Change as a result of changes in output
What are total costs?
Total fixed costs + total variable costs
What is profit
Difference between total revenue and total costs
Total revenue - total costs
The amount of revenue left over once costs have been deducted
What factors affect the choice of finance
Amount needed, reason why it’s required, circumstances of the business, legal status of the business
What is break even?
The point at which cost and income are equal and there is neither profit or loss
What is break even?
The pint at which total revenue and total costs are equal and there is neither profit or loss
How do you calculate break even point in units?
Fixed costs/(sales price per unit-variable cost per unit)
What is contribution per unit?
(Sales price per unit-variable cost per unit)
What is margin of safety? Equation + definition
Actual/ budgeted sales/output (units) -
Break even sales/ output (units)
Amount by which the current level of output exceeds the BEP.
What’s a positive MOS?
Profitable business, a large MOS means sales can fall by more units before the BEP is reached. Therefore if sales decrease there is less risk of the business making a loss
Ways to reduce break even output?
Maximise added value per unit sold: aim to maximise the seeking price per unit.
Negotiate to reduce the cost of raw materials and other inputs (=lower variable costs).
Keep overheads or fixed costs under control.
What are the benefits of break even analysis?
Helps entrepreneur + finance-providers better understand the viability and risk of a business idea
MOS calculation shows how much a sales forecast can prove over-optimistic before losses are incurred.
Calculations are quick and easy.
Illustrates the important of keeping fixed costs down to a minimum.
Focuses on how long it will take before a start up reaches profitability-the required output.
Limitations of break even analysis
Unrealistic assumptions-products are not all sold for the same seeking price at different levels of output; fixed costs can change over time.
Most businesses sell more than one product.
A planning aid rather than a decision making tool.
Sales are unlikely to be at the same output (build up of stocks/wasted output).
Variable costs do not always stay the same.
