Precise 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
- Can be used to get bank loans
What is a budget?
A plan of income and expenditure over a period of time
What is Variance Analysis?
The difference between the planned and actual budget figures
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 - helps control spending
What is zero based budgeting and the advantages and disadvantages?
There is no historical data therefore budgets needs to be justified
+Money is spent efficiently on sensible things and not wasted
-Lack of flexibility…Department may require finance immediately (eg a demand spike) which the justifying process may take too long for
What is historical budgeting and the advantages and disadvantages?
Using historical data to create a budget and adapting it for the future
+Realistic as they are based on the past performance
-Assumes all factors ar constant
What is the formula for contribution per unit?
Selling price - Variable price per unit
What is the formula for total contribution?
Total Revenue - Total Variable Cost
What are the uses of break even analysis?
- Decide whether a business idea is profitable and viable
- Identify the level of output and sales necessary to generate a profit…help scale the business
- Assess changes in the level of production
- Assess the effects of costing and pricing decisions
What is Expenditure (Cost) Budget?
The agreed amount spent of a business over a period of time
What is sales/ Income Budget?
The agreed income of a business over a period of time
What is Profit Budget?
Income budget - expenditure budget
What is adverse variance?
Where the actual budget is worse than the planned, leading to lower profits or higher costs
This causes diseconomies of scale and increase in competition
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 overtrading?
When a business does not have enough cash to support its production and sales, usually because its growing too fast
What is administration?
When a failing business appoints a specialist to rescue the business or wind it up
What can we find out from a statement of financial position?
- The value of a business
- The current assets a business holds
- Short-term liabilities the business will need to pay within a year
- The liquidity of a business
- The long term debts of a business
- How a business has been financed
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 - Promote to encourage sales
Increased usage - Eg train companies are busy during peak hours and less busy during off peak hours
Outsourcing -
Redeployment- employees getting new job roles in the same company
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 mothballing?
Leaving machines, equipment or building space unused but maintained which can be brought back into use if necessary
What is inflation?
When the general price of things increase overtime
What is exchange rates?
The price of one currency for another
What is interest rates?
The cost of borrowing or the reward for saving money
How does changes of inflation effect businesses?
Increased costs - changing prices costs money
Uncertainty - fluctuations
Borrowing and lending - increased interest
Consumer reactions - save more
International competitiveness - overseas companies may not want to pay higher prices and home country people many shop overseas
How does changes of exchange rates effect businesses?
Impacts businesses costs if the are buying from overseas
Could help selling goods in overseas
How does changes in interest effect businesses?
Makes borrowing expensive if ingress increases, therefore, less likely to borrow and more likely to save
Consumers and more likely to save if ingress increases
How does changes of taxation and government spending effect businesses?
Increased tax may make customers save their money
When the government spends money road works can improve and education when could help businesses transport
How does the business cycle effect business?
Output - Increase output during a boom, decreased output during recession
Profit - Increased profits during a boom
Business confidence - high confidence during the boom and recovery stage
Employment - employees more during a boom
Business start ups/closures - more business start ups in a boom and closures during a recession
What is deflation?
When the general price of things decrease over time
What are the 4 stages of the business cycle in order and what do they mean?
Boom
Downturn
Recession
Recovery/ Upswing
What is the effects of economic uncertainty on the business environment?
Decision making - unpredictable behaviour
Unexpected events -
Business confidence -
How does customer protection affect businesses?
Increases costs - Changing products to ensure safety
Quality control - Customers must get what’s expected. Eg drink companies not consistently filling up the bottles to the amount stated on the bottle
Dealing with customers complaints - Businesses have customer service departments to counter customers complaints
Changes in business practice - Ensure businesses are treating their customers fairly
How does employee legislations affect businesses?
Negative:
Compliance costs - Background checks and right to work checks, insurance policies, provide financial details to the HMRC
Higher labour costs - Businesses have to meet national minimum wages
Changing working practices - Having recruitment procedures that help prevent discrimination
Loss of flexibility - Employees may ask for flexible working which may disrupt the businesses work flow
Penalties - Businesses who fail to comply may face penalties which could damage their reputation
Positive:
- Businesses are unable to exploit customers by lowering their wages
- Improves employee motivation which could improve motivation
- Improve businesses culture which could improve their image
How does environmental legislations affect businesses?
Marketing - By businesses adapting environmental legislation it could help with marking to encourage more people to purchase environmentally friendly products. However this may not be the case for oil companies
Finance - The upfront costs may be expensive. It can help a business reduce their costs which could help gain a competitive advantage.
Operations Management - Could lead to businesses changing their materials to become more sustainable
Human Resources - Staff may need to be retrained or higher skilled workers may be required.
Effects businesses most who are high polluters.
How does competition policy affect businesses?
Positive:
Designed to promote competition which firms can benefit from. Eg lower barriers of entries may make it easier for new businesses to get into the market
May help benefit the economy as it encourages innovation and efficiency. This could encourage businesses to develop new products, reduce costs and make progresses into overseas markets. This could help generate more revenue and profit from exports. This could also raise income and employment.
Negative:
Can slowdown the process of mergers and takeovers which can cost the businesses a lot of money.
How does health and safety legislations affect businesses?
Costs:
Training costs, health and safety officer,
Penalties:
Failure to comply could lead to accidences and fines
Benefits:
Good health and safety record could lead to a positive reputation, which could make it easier to recruit.
Makes employees feel protected.
Increased productivity as employees aren’t worried to get any injuries which helps reduce absences.
What are the 4 government objectives?
Low and stable inflation
Full employment (low unemployment)
Keep borrowing down (balance of payments equilibrium)
Help the economy grow (increase output, spending and investment)
What is the economic growth (GDP)?**
The total market value of all final goods and services produced within a country in a given period
What is the impact of legislations on businesses?
Can increase costs, limit competitiveness, damage business reputation
Can create opportunities for some businesses and encourage innovation.
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 within the market, 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 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 (Uncompetitive) -A market dominated by a single business
What three factors do businesses need to consider when operating in a dynamic/ competitive 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 the advantages and disadvantages of SWOT analysis?
+Helps strategic decision
+Low cost simple method
+Could be combined with other decision making models like PESTLE
- Subjective
- Doesn’t offer clear solutions
Rivalry within the market (What makes competition fierce? Key problems? Business options?)
Competition is Fierce if:
- Easy entry to market
- Easy for customers to switch
- Little differential of products
Key problems:
-Profit margins are squeezed
Options for businesses to consider;
- Reduce costs to help reduce price
- Differentiate
- Takeover/ merge
Bargaining power of suppliers (What makes suppliers powerful? Key problems? Business options?)
Supplier Power is High if:
- Few suppliers
- Supplier product is essential for production
Key problems
-High production costs and unfavourable terms for the business
Options for Businesses to Consider
- Build strong relationships with suppliers
- Agree long term contracts
- Backwards vertical integration
Bargaining power of buyers (What makes competition fierce? Key problems? Business options?)
Buyer Power is High if:
- There is little difference between products offered by competitors
- Product are price sensitive
- Customers buy in large quantities
- Easy for customers to switch between competitors
Key problems
-Prices are forced to be low…pressure on cash flow
Options for Businesses to Consider:
- Develop a USP
- Lower prices to attracts customers
- Forward integration if buyer is a business
Threats of substitutes (What makes competition fierce? Key problems? Business options?)
Threats of substitues is high if:
- Alternative products exists
- Alternative prices fall
- Customers can easily switch to substitues
Key Problems:
- Buyers have high bargaining power
- Competiton exists outside of the market
Options for Businesses to consider:
- Develop a USP
- Lower prices to attracts customers
- Forward integration if buyer is a business
Barriers to entry (What makes competition fierce? Key problems? Business options?)
Barriers Exist when:
- Capital investment to enter the market is high
- Customers are brand loyalty
Key Problems:
-If few barriers exist it is easy for new competitors to enter the market and increase competitive rivalry
Options for a businesses to Consider:
- Innovation
- Build strong relationship with customers
- Growth to gain EOS
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 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 forecasting?
- Relatively short term
- Dependant on the quality of the market research
- Lacks external factors
- Less valuable in volatile markets
- Advanced computer software can be costly
- Must be revised frequently to take account of new data and external factors
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?
TA - TL
Net Assets
Why are shareholders interested in the statement of financial position?
- Shareholders may see how their investment has been spent
- Suppliers and creditors will be interested to see whether the business will be able to pay its debts
- Managers may use it to analyse liquidity and asses the level of risk associated with debt
