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business a level > Topic 5 Finance > Flashcards

Topic 5 Finance Flashcards

1
Q

What is sales revenue

A

The value of total sales made by a business within a period

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2
Q

What are costs

A

The expenses incurred by a firm in producing and selling its products, such as wages and raw materials

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3
Q

What is profit

A

It is made when sales revenue exceeds total costs

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4
Q

Why is profit important (3)

A
  • it provides a measure of success
  • it is a source of capital
  • it attracts further funds from investors enticed by a high return on their investment (shares and dividends)
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5
Q

Formula for sales revenue

A

Quality sold X selling price

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6
Q

How can a firm increase its revenue? What does it depend on

A

It depends on price elasticity

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7
Q

If price goes up and demand does not change much, what is this called

A

Price inelastic

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8
Q

If the price goes down and demand increases, what is this known as

A

Price elastic

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9
Q

Why is cost information a very important element in managing a business (2)

A
  • Can the price customers are willing to pay cover the costs of production?
  • How do actual costs compare to budgeted costs? Is the business working costs efficiently?
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10
Q

What are fixed costs

A

Costs that do not change directly with the level of output. They exist even if the business does not produce any goods

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11
Q

What are variable costs

A

Costs that can vary directly with the level of output. The more a business produces, the higher the cost would be

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12
Q

Total costs formula

A

Fixed costs +total variable costs

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13
Q

Profit formula

A

Total revenue - total costs

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14
Q

Gross Profit formula

A

Sales - cost of sales

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15
Q

Net profit formula

A

Gross profit - expenses

Gross profit= sales - cost of sales

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16
Q

Profit for the year formula

A

Net profit - all other costs such as tax etc

Net profit = gross profit - expenses

Gross profit= sales - cost of sales

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17
Q

Profit margin formula

A

Profit
——- X 100
Sales revenue

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18
Q

Price elasticity of demand formula

A

% change in demand
_______________________

% change in price

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19
Q

How to increase profit

-variable costs? (2)

A

Reduce variable costs per unit

  • bargain with suppliers for cheaper deals
  • improve productive efficiency to increase productivity and lower wastage
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20
Q

How to increase profit

-fixed costs?

A

Increase output

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21
Q

Factors that affect the level of demand (5)

A
  • price and incomes
  • tastes and fashions
  • competitor actions
  • seasonal changes
  • changing technology
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22
Q

What is turnover

A

Revenue

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23
Q

What are the 2 ways of increasing revenues

A

-increase quantity sold e.g. by cutting the price offering a volume related incentive (2 for 1)

-achieve a higher selling price
•best to add value rather than simply increase price

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24
Q

Why are tracking costs important (3)

A
  • it drains away profit
  • main cause of cash flow problems
  • changes as output or activity of business changes
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25
Q

What is profit (4)

A
  • a measure of business success
  • a motivating factor and incentive
  • a return on investment
  • reward for taking risks
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26
Q

What is profitability

A

A relative measure- comparing profits to another variable e.g. sales revenue

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27
Q

If there is a high added value, what does this suggest

A

A high added value and a strong brand

28
Q

How can gross profit margin be managed (3)

A
  • increase added value- by having the advantage of economies of scale
  • go to different (maybe cheaper) suppliers, except without affecting quality
  • increase sales through: increased price, promotion, we want the good to price inelastic so we don’t lose a lot of customers
29
Q

How to improve operating profit margin (net profit)

A
  • increase selling price

- decrease costs (both direct and overheads)

30
Q

How can overheads be reduced (6)

A
  • moving business to a cheaper country
  • lose staff, make redundant or cut their hours
  • machines to place workers
  • change suppliers
  • reduce wastage of electricity etc
  • outsourcing- get other people to do advertising etc
31
Q

How may a business have a low net profit margin

A

Their added value may be very low

32
Q

Internal influences on financial objectives (3)

A
  • ambitions of the leader
  • finance
  • operations
33
Q

External influences on financial objectives

A
  • competitive environment
  • economic environment
  • government
34
Q

Ethical environmental influences on financial objectives (4)

A
  • interest in the environment
  • bargaining with suppliers
  • taxation
  • public imagine
35
Q

Contribution formula

A

Selling price - variable cost per unit

36
Q

What does all the contribution from all items sold pay towards the for the business

A

Fixed costs

37
Q

Once enough products have been sold to make enough money to pay the fixed costs, the contribution from each item is

A

Profit

38
Q

Total contribution formula (2)

A

Total revenue - total variable costs

Contribution per u it X number of units sold

39
Q

If the total contribution EXCEEDS the fixed costs, the business is making a …

A

Profit

40
Q

When will a firm break even

A

When total revenue = total costs

41
Q

If the FIXED costs exceed the total contribution, the business is making a …

A

Loss

42
Q

Factors affecting break even output (3)

A
  • changes in selling price
  • changes to variable costs
  • changes to fixed costs
43
Q 
Strengths of break even analysis 
(4)
-what does it focus on
-what does it help
-what does MOS calculation show
-what does it illustrate
A
  • focuses on what output is required before a business reaches profitability
  • helps management and finance providers better understand the viability and risk of a business or business idea
  • margin of safety calculation shows how much sales forecast can improve over-optimistic before losses are incurred
  • illustrates the importance of keeping fixed costs down to a min
44
Q

Limitations of break even analysis

  • what are the assumptions and give an example
  • what are unlikely
  • what foes not always stay the same
  • what does BE only work for
  • what may increase
A
  • unrealistic assumptions1 products may not be sold at the same price at different levels of output
  • sales are unlikely to be same as output-there may be build up of stock or wasted output
  • variable costs do not always stay the same
  • only works for one product
  • fixed costs could change e.g. you may need new workers etc
45
Q

What 2 things does a business need to consider before increasing price

A
  • price elasticity (price inelastic because you do not want to lose customers)
  • level of competition
46
Q

An advantage of increasing your price for BE

A

You do not have to sell as many products/ services to BE (reduces BE output)

47
Q

What does contribution look at

-and what is it used to calculate

A

The profit made on each product- it is used in calculating how many items need to be sold to cover all the business’ total costs

48
Q

What is margin of safety

A

The difference between actual output and breakeven output

49
Q

What benefits does a cash flow forecast provide (3)

A
  • advanced warning of cash shortages
  • making sure tue business can pay suppliers
  • spot problems with customer payments
50
Q

what is cash flow

A

The flow of money INTO and OUT of a business in a given time period

51
Q

What is cash flow forecasting

A

Estimating when cash inflows and outflows will occur and how much they will be

52
Q

Importance of cash flow management

Cash position

A

Current and future cash position can be continually monitored

53
Q

Importance of cash flow management

Cash needs

A

Cash needs and availability can be shown on a cash flow forecast

54
Q

Importance of cash flow management

Bills

A

Bills must be paid by cash

55
Q

Examples of cash inflows (4)

A
  • cash sales (revenue)
  • receipts from trade customers
  • sale of spare assets
  • investment of share capital
56
Q

Examples of cash outflows (4)

A
  • payment of wages and salaries
  • buying equipment and supplies
  • interest on bank loan or overdraft
  • payment of dividends
57
Q

What are payables (cash flow related)

A

Money owed to suppliers by a business (when goods have been bought on credit)

58
Q

What are receivables

A

Money owed to a business by customers who have bought goods on credit

59
Q

Total inflows =

A

All up all cash received

60
Q

Total outflows =

A

All up all payments made

61
Q

Net cash flow =

A

Total inflow - total outflow

62
Q

Opening balance =

A

Amount of cash in bank at the start of the month

63
Q

For an existing business, what is the opening balance

A

The closing balance of the previous month

64
Q

Closing balance =

A

Net cash flow + opening balance

65
Q

What causes cash flow problems?

  • low …
  • increased …
  • buying …
  • late…
  • unexpected …
  • over…
  • capacity
A
  • low sales
  • increased costs outside of the business’ control
  • buying machines or equipment
  • late payments
  • unexpected costs
  • overtrading
  • too much spare capacity (FC are too high e.g. if u have extra staff to look after ur extra stock)
66
Q

How can we improve cash flow

  • lease…
  • outflows
  • suppliers
  • shares
  • price
  • debt
  • credit
  • stock
A
  • leaseback
  • reduce outflows
  • negotiate with suppliers (or alternative suppliers)
  • sell more shares (at expense of losing control of business)
  • change price
  • debt factoring
  • credit control with customers
  • hold less stock
67
Q

What are the 4 ways to analyse cash flow forecasts

  • closing and opening balance
  • plot trends
  • timings of payments and receivables
  • net cash flows
A
  • look at closing balances and compare them to the opening balance figure
  • use monthly closing balances to plot trends- there may be short term problems due to seasonality but a recovery may be apparent
  • look at the timings of payments and receipts. How long do customers have to pay? How long is the credit period?
  • look at the net cash flows. Are you continually spending more than you are receiving?

business a level (13 decks)

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