Paper 2 Flashcards
What is Sales Forecasting?
Using a range of techniques and information to predict future sales volumes and values.
What are the benefits of sales forecasting?
- Gives the business a clear idea of what cash inflows can be, so that finances can be managed
- Allows business to plan orders (some suppliers need notice)
- Enables the business to know if it has the correct no. of staff for the predicted staff
- Allows the business to have the correct capacity for the projected orders
What factors may affect sales forecasting?
- Customer trends
- Economic Variables
- Actions of competitors
- Seasonal variations (eg xmas)
- Fashion
- Long-term Trends
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 sales volume?
The quantity of output sold in a set time period
What is the formula for Break-even?
Fixed Cost / (SP - VC)
What is the Break-even point?
Where total revenue = total cost
What is the Margin of Safety?
Its the difference between the break-even point and the current level of output.
What are the limitations of the Break-even point?
- Assumes all stock is sold
- Costs are rarely constant
- Inefficient when multiple products are involved
What are the benefits of the Break-even point?
- Simple and easy to use
- Can help with decision making
- Can be used to analyse the potential impact of changing prices and costs
What is a budget?
A financial plan for the future
What are the types of budgeting?**
Cost Budget -
Sales Budget -
Profit Budget -
What is Variance Analysis?
The difference between the figure that the business has budgeted for and the actual figure
What are the difficulties of budgeting?
- Creating figures for the budget
- Motivation ( unrealistic budgets)
- New government decisions can impact the budget
- Reliant of accurate data
What is the purpose of budgeting?
Motivation - Provides workers with targets
Planning - Forces management to plan for the future
Efficiency - don’t spend too much
Communication -
What is zero based budgeting?
There is no historical data therefore budgets needs to be justified
What is historical budgeting?
Using historical data to create a budget and adapting it for the future
What is the formula for contribution?
Selling price - Variable price per unit
What is the formula for Gross Profit?
Revenue - Cost of sales
What is the formula for Operating Profit?
Gross profit - Operating expenses
What is the formula for Net Profit (profit for the year)?
Operating profit - interest (and exceptional costs)
What is the formula for Gross/ operating/ net profit margin?
(Gross Profit / Revenue) * 100
For the others just replace gross profit with the others
What’s the difference between cash and profit?
Cash - Money that you have currently available
Profit - Money leftover after all expenses are paid
How might a business lower it’s costs?
- Buy cheaper resources
- Using existing resources more efficiently
How can you improve profitability?
- Raise prices
- Lower costs
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 is the formula for current ratio?
Current assets/ Current liabilities
What does the current ratio mean?
Tells us how effectively a business is using its working capital
A ratio between 1.5 and 2 is good
Ratio < 1 - cash problems
Ratio > 2 - too much working capital
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
What is the acid test ratio formula?
(Current assets - Inventories) / Current liabilities
What is working capital?
The amount of money required to pay for the day to day trading of the business
E.g. a business needs working capital to pay expenses such as wages, utilities, raw materials
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
Why is cash important?
Without cash the business wouldn’t exist. They would fail to pay off their loans and any bills they have.
What is the formula for working capital?
Current assets - Current liabilities
What does it mean if a business have too much working capital?
They don’t use the extra money to grow or improve the business
What are some internal causes of business failure?
Lack of planning - Cash flow problems - running out of cash Lack of funds Relying on a narrow customer base Marketing problems Failure to improve Lack of business skills Poor leadership
What are some external causes of business failure?
Competition Changes in legislation (changes in laws) Changes in customer tastes Economic conditions Changes in market prices
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 the statement of financial position (balance sheet)?
A summary of a businesses assets, liabilities and capital.
What are some financial and non financial factors of business failure?
Financial
-Bankrupt because of a shortage of cash
Non-Financial
- Lack of planning
- Lack of skills
- Cant compete effectively
- Cant meet customers needs
- Reluctant to change
- Adverse economic conditions
What is liquidity?
Liquidity refers to the day to day cash flow
What is production?
When resources are changed into products
What is job production with an example?
When a business produces a one off bespoke item for a customer
E.g. weddings
What are the advantages and disadvantages of job production?
+High level of quality
+Meets customers requirements
+Can charge higher prices
- Higher costs
- Lower levels of output
- Skilled labour is expensive
What is flow production with examples?
Producing identical products on a mass scale
E.g. tooth brushes, toothpaste
What are the advantages and disadvantages of flow production?
+Very low unit cost
+Out put can be produced quickly
- Huge start up costs
- low motivation for workers
What is cell production with an example?
Multiple groups of people work on a single project
E.g.
What are the advantages and disadvantages of cell production?
+Workers become multi-skilled
-Potential rivalry between different cells. Conflict may arise if one cell is left to wait
What is batch production with examples?
Producing a group of identical products
E.g. bread, furniture
What are the advantages and disadvantages of batch production?
+can be changed to meet of the demand
+can be mechanised for certain objects
+Employees can become really good at their jobs
- Higher unit costs
- Mistakes can be catastrophic
- Workers may be demotivated with repetitive tasks
What is productivity?
The relationship between input and outputs in the economy.
What factors affect productivity?
Education and training Motivation of workers Labour flexibility Capital productivity Investments in new technology
What is the formula for labour productivity?
Output/ No. of employees
What is the formula for capital productivity?
Output/ capital Employed
What is efficiency?
Making the best use of all a business’s recourses
What are some factors that may increase efficiency within a business?
Outsourcing Relocating Downsizing Delayering Investing in new technology Lean production Kaizen JIT Production
What is the difference between labour and capital intensive production?
Labour Intensive - Intensive production relies mainly on labour
Eg ready meals, hairdressing
Capital intensive - Intensive production relies mainly on capital
Eg airports, car manufacturing
What is labour intensive?
A process that requires a large amount of labour to produce its goods or services.
What is capital intensive production?
A process that require large amounts of investment to produce a good or service, therefore, having a high percentage of fixed assets, such as property, plant, and equipment (PP&E).
What is capital utilisation?
The use that a business makes of its resources
What is the formula for capacity utilisation?
(Current output / maximum Possible Output) * 100
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 advantages and disadvantages of over-utilisation?
+Lower average costs
+Staff may feel they have a secure job
+Potential opportunities for overtime
- Over worked workforce
- Unable to respond to increased demand
- May not have free time (FST)
What are the ways of improving capacity utilisation?
Increased sales
Increased usage
Outsourcing
Redeployment- employees getting new job roles in the same company
What is stock?
The materials required to produce the goods or service for a customer
What is the link between productivity and competitiveness?
If your firm is more productive it can help reduce unit costs. This could lead to competitive pricing
What is buffer stock?
The minimum amount of stock you need so that you have enough if needed to produce the goods or service
What are the implications of having have too much stock?
- Opportunity cost
- Cash flow
- Increased storage costs
- Increased wastage
What are the implications of having have too little stock?
- Lost customers
- Employees may feel unsecure within their jobs
What is just in time (JIT)?
A system where no buffer stock is hold as raw materials are delivered when they are required
What is waste?
The loss of resources within the production or service process
What are the competitive advantages from lean production?
- Raises in productivity
- Reduces costs and cuts lead times
- Reduced defective products
- Improves reliability and speeds up design time
What is quality?
Meeting or exceeding the requirements of customers
What is quality control?
The process of trying to catch defective goods from being sent to customers
What is quality assurance?
Measures the business introduces to try prevent defects from occurring
What is total quality management (TQM)?
A process that aims to eliminate all errors in the production process
What does the kaizen approach involve and the advantages and disadvantages?
Continuous small improvements to the business
+Easier to implement
+People are less likely to resist the changes
What does the Traditional approach (change) involve and the advantages and disadvantages?
Infrequent change that is usually significant change
+
+
What are the advantages and disadvantages of total quality management?
+Improves efficiency
+May improve overall quality
+May enhance the brand as they’ll be more reliable
- High upfront cost (new machinery)
- Training staff can be costly
- Managers may lack confidence
What are the competitive advantages from quality management?
-Having high quality goods or service can allows the business to charge premium prices (however quality is subjective)
Mission Statement
A brief statement describing a businesses main purpose and objective
What is Corporate Objectives?
Objectives of a medium/ large business and should be created from the mission statement
What are Functional objectives?
Each department will set their own objectives which should be created from the corporate objective
What should ‘SMART’ objectives be? I.e. what do they stand for
Smart objectives should be Specific, Measurable, Achievable, Realistic and Time-Related
What is Ansoff’s Matrix?
A tool used to help assess the level of risk associated with a new strategy or product for a business
What is Ansoff’s 4 strategies?
Market penetration, product development, market development, diversification
What is Porter’s Strategic Mix and what do they mean?
Believed that a business should focus on only three elements to succeed:
Cost leadership - Charging the lowest price
Diversification - Unique, USP
Focus on a niche - small niche
What is Kay’s Distinctive Capabilities?
Believed that a business should exploit what their good at
What are the three elements of Kay’s Distinctive Capabilities?
Innovation, Reputation, Architecture
What is SWOT analysis and what does it stand for?
A tool used to identify a businesses current position and the external factors that may affect it
Strengths, weaknesses, opportunities and threats
What is PESTLE Analysis and what does it stand for?
A tool used to look at external factors and their potential impact on the business
Political, economy, social, technology, legal, environment
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, Bargaining power of suppliers, Bargaining power of buyers, Threats of substitutes, Barriers to entry
What might determine rivalry within a market?
Low barrier to enter, easy substitutes for customers, little diversification of products
What is the Aim of Portfolio Analysis?
To categorise a company’s products with specific characteristics in order to make strategic decisions
What is the 4 key parts of the Boston’s Matrix and what do they mean?
Stars - High growth products
Question Marks - low growth market shares in high growth markets
Cash Cows - low growth products with high market share
Dogs - products with low market share and market growth
What’s the difference between a Strategy and Tactics?
A strategy is a long term plan that a business will take to achieve its objectives whereas tactics are the day to day decisions taken by middle managers
What is the purpose of a mission statement?
- It forms a commitment to the customers
- Helps bring the the company’s workforce together with a shared purpose
What is SWOT Analysis used for?
Helps develop corporate strategy, decision making with new products, new marketing strategies, whether or not to outsource specific business tasks
What is it meant by an oligopoly and monopoly?
Oligopoly-A market dominated by a few large markets
Monopoly-A market dominated by a single business
What is an objective?
- Something that the business intends to achieve
What is Market penetration and the advantages and disadvantages?
Achieving growth in existing markets with existing products
+Safest strategy
+
What is product development and the advantages and disadvantages?
Marketing new or modified products in existing markets
+keeps customers interested
+
What is market development and the advantages and disadvantages?
Marketing existing products in new markets
+No need for improving the punctuality of the product
+
What is diversification and the advantages and disadvantages?
Introducing new products into new markets
+Opportunity for huge growth
+
What does Architecture, Reputation, innovation mean for Kays Distinctive capabilities?
Architecture - Refers to the contacts and relationships within and around the business. Adds value by being more efficient
Innovation - Developing new products and processes, requires heavy research and development can be legally protected
Reputation - Refers to the positive associations a business builds eg quality reliability, service, honesty, prestige
What is distinctive capabilities?
Features that are unique to a business
What three factors do businesses need to consider when operating in a dynamic market?
New entrants - stronger competition
New products - businesses may be forced to innovate and make changes
Consolidation (businesses leaving the market) - some businesses get bigger
What are Decision Trees and their purpose?
A method of seeing possible outcomes from business decisions. Used to help determine the best options
What are the + and - of Decision Tress?
+Clarifies possible courses of action
+Adds financial data to decisions
- Probabilities are often estimated
- Doesn’t consider qualitative information
- Doesn’t consider the dynamic nature of business
What are the limitations of quantitative sales forecasting?
- Relatively short term
- Dependant on the quality of the market research
- Less valuable in volatile markets
- Unlikely to consider external factors
What is extrapolation?
Uses historical data to predict ahead
How to calculate a moving average?
Add the last ‘n’ number of months then divide it by ‘n’. To calculate the next period move across one and repeat.
Why might a business want to calculate a seasonal variation when predicting future sales figures?***
-To provide more accurate predictions
What is investment appraisal?
A series of techniques designed to assist businesses in judging the best place to invest
What are the 3 financial methods for investment appraisal?
- Payback: The time taken to recoup the initial investment and consider the cash inflows over a number of years.
- Average rate of return: Measures the profit achieved on an investment over time
- Net present value: Measures the future value of money by discounting cash inflows
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 are the limitations of quantitative sales forecast?
- Relatively short term
- Dependant on the quality of the market research
- Lacks external factors
- Advanced computer software can be costly
- Must be revised frequently to take account of new data and external factors
What are the + and - of using Extrapolation?
+A simple method of forecasting
+Not much data required
+Quick and cheap
- Unreliable if there are significant fluctuation in historical data
- Assumes past trends will continue into the future (which is unlikely)
- Ignores qualitative factors (e.g changes in tastes)
What is payback period?
The time it takes for a project to repay its initial investment
What are + and - of Payback period?
+Simple and easy to calculate & easy to understand the results
+Focuses on cash flows ( good for businesses where cash is scarce)
+Easy to compare with other projects
- Doesn’t look at the overall project return
- May encourage short term thinking
- Ignores qualitative aspects
- Doesn’t actually create a decision for the business
What is Average (Accounting) Rate of Return and the formula?
A methods that measures the net return each year as a percentage of the capital cost of the investment
ARR(%) = ( Net Return (Profit) pa / Capital Outlay (Cost) ) * 100
What is Investment Appraisal and the 3 methods?
A series of techniques designed to assist businesses in judging the desirability of investing in particular projects
- Payback period
- Average Rate of Return
- Discounted Cash Flow
What are the + and - of using the ARR method?
+Shows clearly the profitability of an investment
+Easy to compare
+Easier to identify opportunity cost of investments
-Ignores the effects of time on the value of money
What are the + and - of the Discounted Cash-Flow method?
+Considers the value of money over time
+
- Complex to calculate
- If the rate of discount is high, it may seem that no project will ever be profitable
What is discounted Cash Flow (Net Present Value)?
Understanding what profit/ cash inflows in the the future is worth at its present value.
What is float time?
The time you have available to complete a task while another is taking place
Why is Critical Path Analysis important?
Efficiency - it shows the tasks that can take place concurrently and highlights those which are crucial to prevent an overall delay
Ensures deadlines are met to save costs and protect reputation. Penalty clauses are often written into contracts for projects. Bonuses can be awarded for meeting/beating deadlines.
It sets targets and minimises time spent on each task. Experience will help a business calculate the time needed for each task.
Working capital control - identifying when resources will be needed so capital isn’t tied up in raw materials and equipment eg hiring a digger or buying bricks. JIT.
What are the limitations of using critical path analysis?
- Difficult to estimate the completion of an activity
- Can be difficult when it comes to bigger projects
What are the 4 human resources strategies to increase productivity, retention, reduce turnover and absenteeism?
Financial rewards - increased pay
Employee Share Ownership - Gives employees a share of the company (allows them to feel apart of the company)
Consultation strategies - involve employees in the decision making, involves listening to employees
Empowerment strategies - allowing staff to set their own objectives (need to have a strong culture)
What is the equation for labour productivity?
Output per period / Number of employers per period
What is the best type strategy for increasing labour productivity and why?
Empowerment Strategies - allows experienced staff to set their own objectives, requires a strong culture,
However staff needs to be confident
What are the advantages and disadvantages of having a good labour productivity?
+Drives down costs
+increases competitiveness - business can charge lower prices
+Makes better use of capital resource -
+Makes optimum use of Human Resources -
-May Compromise on quality
What is the formula for labour turn over?
( Staff leaving per year / Average number of staff ) * 100
What is the best strategy for improving labour turnover?
Employee Share Ownership - makes staff feel part of the organisation and want the organisation to grow. Only managers (higher ups) usually get shares
What might cause labour turnover?
Low pay
Lack of training and development opportunities
Poor working conditions
Poor recruitment and selection processes
Economic boom
What is the formula for labour retention?
( Staff not leaving per year / Average no of staff ) * 100
What is the best strategy for labour retention?
Financial Rewards - more money can lead to employees working harder
What is the benefits of a high retention rate?
Lower requirement and selection cost
Better continuity
Stable workforce
Better experience and skill sets of workers
What is the formula for absenteeism?
( Days absent per year / Total number of working days ) * 100
What is the best strategy for absenteeism?
Consultation strategies - employees are more likely to motivated if they are involved in the decision making process
Why is absenteeism bad?
Business has to pay sick pay
Temporary staff have to be paid for
Existing staff have to be paid overtime
Output suffers - temp staff are less productive
Absence can delay / prevent big projects
Production delays / quality decrease could prevent customers
Demotivating for remaining staff
Cultural shift - is it ok to call in sick
What is the gearing ratio?
It tell you what proportion the business value is financed by long term debt
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?
Fixed Assets + Net Current assets
Or
TA - TL
