personal and business finance - learning aim E.

Question 1

__ & __ = break even (units)?

Answer 1

fixed costs / contribution per unit = break even (units)

Question 2

__ & __ = contribution per unit?

Answer 2

selling price - variable cost = contribution per unit

Question 3

__ & __ = total costs?

Answer 3

fixed costs + variable costs = total costs

Question 4

__ & __ = total revenue?

Answer 4

quantity sold x selling price = total revenue

Question 5

__ & __ = margin of safety (units)?

Answer 5

actual sales in units - break even level of output = margin of safety

Question 6

__ & __ = margin of safety (value)?

Answer 6

margin of safety (units) x selling price = margin of safety (value)

Question 7

__ & __ = profit (1)?

Answer 7

contribution per unit x margin of safety (units) = profit

Question 8

__ & __ = profit (2)?

Answer 8

all units sold - fixed costs = profit

Question 9

what is break-even?

Answer 9

break-even occurs when income and expenditure are equal so the company is not making a profit or a loss.

Question 10

what are the four types of cost?

Answer 10

variable costs, fixed costs, semi-variable costs and total costs.

Question 11

explain variable costs.

Answer 11

these vary with the level of output, e.g. raw materials. the more products a business makes, the more they will need to spend on raw materials.

Question 12

explain fixed costs

Answer 12

These do not vary with the level of output, e.g. the rent payment will stay the same regardless on how many sales are made.

Question 13

explain semi-variable costs

Answer 13

mixture of both fixed and variable costs, e.g. mobile phone contract. there is a fixed fee of £50 per month but if you exceed your allowance you must pay an extra fee.

Question 14

explain total costs

Answer 14

the total amount of fixed and variable costs added together.

Question 15

what are the four sales terms.

Answer 15

total revenue, selling price per unit, sales in value and sales in volume.

Question 16

explain total revenue

Answer 16

the total amount of money coming into the business from the sale of products or services.

Question 17

explain selling price per unit

Answer 17

this is the amount a customer pays per unit bought.

Question 18

explain sales in value

Answer 18

this is the total amount of sales made expressed as a monetary value like ‘£’.

Question 19

explain sales in volume

Answer 19

this is the amount of sales expressed as a quantity.

Question 20

what is a cash flow forecast?

Answer 20

a document that helps estimate the amount of money that will move in and out of your business.

Question 21

what does a cash flow forecast allow a business to do?

Answer 21

pay its stakeholders on time.
take corrective action when areas of concern are identified.
create a document that can be used to help receive funding from potential investors and banks.

Question 22

what are some common cash inflows (6 types)?

Answer 22

cash sales, credit sales, loans, capital introduced, sale of assets and bank interest received.

Question 23

explain cash sales

Answer 23

sales made in cash or by card that are received by the seller at the time of purchase or delivery.

Question 24

explain credit sales

Answer 24

where payments are not made until several days or weeks after a product has been purchased. they buyer is given a period of time.

Question 25

explain loans.

Answer 25

an inflow for the business as they may require the cash to purchase assets such as equipment or a vehicle.

Question 26

explain capital introduced

Answer 26

a business owner invests their personal money, stock or assets into the business. most common when a business starts.

Question 27

explain sale of assets

Answer 27

a method of increasing inflows by selling assets owned by the business for cash, to then use within the business

Question 28

explain bank interest received

Answer 28

interest paid by the bank on credit balances.

Question 29

__ & __ = net cash flow?

Answer 29

total inflows - total outflows = net cash flow.

Question 30

__ & __ = closing balance?

Answer 30

total cash available - total outflows = closing balance.

Question 31

__ & __ = total cash available?

Answer 31

opening balance + total inflows = total cash available.

Question 32

what is the opening balance?

Answer 32

the opening balance is the closing balance from the previous month.

Question 33

what are the uses of a cash flow forecast?

Answer 33

planning, monitoring, control, target setting.

Question 33

how can a CFF be used as a planning tool?

Answer 33

it helps to identify where inflows and outflows are coming from, if they are not adequate, it allows for a plan to be put into place to rectify any issues.
it allows for a plan to be put into place to utilise cash surplus or manage months where CF is negative.

Question 34

how can a CFF use monitoring?

Answer 34

a CFF needs to be monitored closely with the actual CF.

Question 35

how can a CFF be controlled?

Answer 35

if there are areas of concern, this can be controlled by attempting to increase or decrease outflows.
without ‘control’ any cash flow issues wouldn’t be able to be resolved until they had occurred.

Question 36

how can a CFF influence target setting?

Answer 36

by completing a CFF it can help the business set targets based on what has been identified in the forecast.

Question 37

what problems might occur on a CFF?

Answer 37

expenses may be too much, so they may need to reduce things like wages (outflows higher than inflows).
inconsistent cash flows throughout the year - for seasonal business (xmas).
cash flow is static and market is dynamic.

Question 38

what are the uses of break-even?

Answer 38

planning, monitoring, control, target setting.

Question 39

how can break-even be used to plan?

Answer 39

it can help to set budgets so BE point is not hampered by costs.
can be used to plan pricing strategies as the price set can impact the BE point.

Question 40

how can break-even use monitoring?

Answer 40

you must monitor the the impact of changing prices or changes in costs.
by monitoring these changes in revenue and costs, it allows for action to be taken and for the problem to be fixed.

Question 41

how can break-even be controlled?

Answer 41

use BE to control costs and see if they are being kept within budget.
it can motivate employees to achieve targets that have been set and controlled based on the BE point.

Question 42

how can BE influence target setting?

Answer 42

once BE is identified, targets can be given to individuals that are calculated to ensure the BE point is met in a timely manner.
sets targets based on expenditure.
set production targets that will enable a certain level of profit to be made.

Question 43

list some advantages of break-even.

Answer 43

informs pricing strategy.
makes it easy to set targets.
can be used to set targets to motivate employees.
shows profit and loss at different levels of output.
clearly shows fixed and variable costs.

Question 44

list some disadvantages of break-even.

Answer 44

targets may be unrealistic and cause stress.
sales forecast may never be reached, therefore BE will never be reached.
if cost or selling price vary slightly, BE point will be impacted.
not ideal for a service as they fluctuate in price.
not useful for more than one product as it only takes into account the cost and selling price of one item.