Unit 3 Flashcards
What is data analysis?
The process of transforming raw data into useable information, in order to present, interpret and analyse a business situation
What is a pie chart?
A graph in which a circle is divided into sectors to represent a proportion of a whole
What is a histogram?
Consists of rectangles whose areas is proportionate to how often a variable occurs in the set of data
What is a Index number?
A figure that shows a price or quantity compared with a starting point, known as base level
How are index number useful?
The way values change over time can be seen, such as prices paid for raw materials, number of employees/customers, sales, productivity and profits
It compares changes overtime and to make the value of these changes clear
How do you work out a index number?
Value in period x100
value in base period
What is Market analysis?
The process of collecting info about the market the business is operating in, in order to create effective objectives to ensure success
What is quantitative data?
Involves the use of numbers, eg size of market and number of customers ect
What is qualitative data?
Looks at views and opinions but doesn’t provide statistically reliable information
What is PED?
Price elasticity of demand
Measures the responsiveness of demand after a change in price
How do you work out PED?
% change in quality demanded
——————————————— x100
% change in price
How to find out the % change in price?
new price - old price x 100
old price
What does PED equal or lower than 0 mean?
Perfect inelastic - demand doesn’t change
What does PED between 0-1 mean?
Inelastic
% change of demand is smaller than % change in price
What does PED = 1 mean?
Unit elastic - Demand change is exact same as price change
What does PED greater or equal to 1 mean?
Elastic - Demand is very sensitive to price
What impact PED has on revenue?
The number of close substitutes
The cost of switching between products
Whether the product is luxury or essential
What is YED?
Income elasticity of demand
Measures the responsiveness of demand after a change in income
How do you work out YED?
% change in quantity demanded x 100
% change in income
What does a YED less than 0 mean?
Negative
Inferior good so as income increases demand falls
What does a YED between 0-1 mean?
Inelastic
Normal good so change in income causes a less than proportional change in quantity demanded
What does a YED greater than 1 mean?
Elastic
Luxury good so as income increase so does demand
What has an impact on YED? (incomes)
Recession - income reduces so consumers will be more price sensitive
Tax - if income tax increases then demand for inferior goods will increase
What could a business do if a product is price sensitive?
• Focus the product on higher-income consumers as their less price sensitive
• Cut costs instead of rising prices
• Attempt to make the product more income elastic
What is a sales forecast?
A prediction of sales revenue based on the historical number of sales made and current market research and trends
What is sales forecasting?
The process of predicting what a businesses further sales will be
Define a budget
An estimate of income and expenditures for a business covering a set period of time
What are factors affecting sales forecasts?
• Consumer trends - Demand changes due to a change in tastes and fashion
• Economic variables - Demand for exports could be sensitive to changes in exchange rates
• Actions of competitors - Improved products released by competitors may reduce sales
What are the difficulties in sales forecasting?
• A new business will find it hard to predict the level of demand accurately as they have no historical info
• If the market is subject to significant technological change, then predictions may be extremely wrong
• New competition may enter the market after the forecast was made
What are the quantitative methods of sales forecasting?
Calculating a three-point moving average
Scatter graphs, correlation & line of best fit
Extrapolation
How do you calculate a three-point moving average?
- Work out the 3 month moving totals
- Find out the mean
Benefit of using the three-point moving average
Calculates trend while eliminating seasonal variation
How can scatter graphs, correlation and line of best fit help to sale forecast?
Shows the relationship between the 2 sets of data
Helps explains data by finding a link between one set of data and another
The closer the points are to the line the stonger the correlation, data is more reliable for the purpose of making predictions
What is Forecasting by extrapolation?
Predicting the future from the trend lines based on the fact that the future is presumed to be similar to the past
It is only accurate if the business operates in a stable environment
What are the methods of qualitative sales forecasting?
• Intuition - Experienced managers may be able to make an educated guess
• Brainstorming - Group discussion takes place to produce ideas concluding in a sales forecast
•Delphi method - Group of experts on the product provide their views on a range of issues
Advantages of qualitative forecasting?
• Allows managers to use their experience and expertise to make predictions that the historical data may not be able to take into account
• It can be used where there are few or none historical data
• Can be benefitial where the market is dynamic and changing all the time
Disadvantages of qualitative forecasting
• Ignores the wealth of the data that may act as an accurate template for future sales sales
• Bias can exist in the personal opinions
• The approach can be inaccurate and uncertain, as there’s no previous data
What is Time-series analysis?
• Method allows a business to predict future sales from past figures
• Allows to identify trend, which is the general direction sales are moving in
What the the advantages of time-series analysis?
• Historical data can be reliable in predicting trends
• Seasonal fluctuations can be measured and compared
What are the disadvantages of time series analysis?
• Quantitative sales forecasting can be unreliable if there are significant fluctuations in the past
• Process assumes that past trends will continue into the future, but this is unlikely in a competitive business environment
• Process also ignores qualitative factors, eg change in tastes or fashion, or extreme shocks such as recession
What is a budget?
An estimate of income and expenditure for a business covering a set period of time
What are variances in a budget?
The difference between the budgeted amount and the actual amount for each item in the budget
What is the purpose of a balance sheet?
Provides a summary of the assets and liabilities of a business at a particular moment in time
This means they can see what they own and what it owes
What are the components included in a balance sheet?
Current assets - converted into cash within 1yr
Non-current assets - eg property
Current liabilities - amounts due within 1yr
Non-current liabilities - bank loans
Equity - Any funds contributed by owners or shareholders + retained profit
What is working capital?
The cash needed to pay for the day-to-day running of the business, eg wages & supplies
How do you work out working capital?
Working capital = Current assets - current liabilities
What is the working capital cycle?
The period of time between the point at which cash is first spent on production of a product and the collection of cash from customer
• time taken to convert working capital into revenue
What is capital employed?
• Measures the total resources the business currently has available
The share capital, retained earnings and long-term borrowings of a business
How to work out capital employed
Capital employed = Share capital + retained earnings + long-term borrowing
What does it mean when capital employed is a high figure?
The healthier the situation of the business
What is depriciation?
An amount deducted from the original cost of an asset to take into account the wear and tear in its use overtime
How to workout straight line depreciation?
original cost of the fixed asset
——————————————-
useful life of the asset
Where does depreciation appear?
on the profit and loss account as an expense and reduces the level of profit, which is useful when a business has to pay corporation tax
What are the advantages of budgets and variance analysis?
• Businesses can combine various sets of data to predict the income and expenditure needed to meet objectives
• Allows managers to monitor business performance
• Motivate staff with performance pay linked
• Managers can focus less on areas of the budget with little variance
• Budgets with large variance means resources can be targeted on areas that give biggest payback in tens of cost saving and revenue made
Disadvantages of budgets and variance analysis
• Inaccurate and unseasonable assumptions can be made leading to false data and unrealistic budgets
• Inflexibility in decision making
• Budgets need to be kept up to date
• Time consuming process
• Can cause businesses to focus on short term instead of long term
• Employees can become demotivated if their held accountable for variances
• If the budget is set wrong then the variance will also be wrong
What does liquidity mean?
A measure of the extent to which a business has cash to meet its immediate and short-term obligations
Assets that can be quickly converted into cash
What’s the purpose of analysing the balance sheets?
To see whether the business has sufficient current assets to cover its current liabilities
Assessing whether the businesses liquidity is satisfactory
Stakeholders can see the situation of the business
What is return of capital employed?
A financial ratio measuring what returns the business has made on the resources available to it
How to calculate ROCE
operating profit
———————— x100
capital employed
What is operating profit?
how much profit in total the business has made from its trading activities before any account is taken of how the business is financed
What’s capital employed?
Shareholders fund + long term liabilities.
= share capital + reserves
It is the amount of share capital and debt that a company has and uses
What does the result of ROCE mean?
It is a good measure of the total resources that a business has available to it
The higher the percentage the better the resources
How to improve ROCE?
A business can increase its operating profit without increasing its capital, or maintain its operating profit and reduce the value of its capital employed
What does Capital ratio show?
The business’s ability to pay the bills due within the next 12 months
What is the desirable current ratio?
Between 1.5 and 2
Lower than 1.5 the business might struggle to meets its debts quickly
Above 2 means they have too much cash and not using their money efficiently
how to calculate the current ratio?
current assets
———————
current liabilities
What’s the acid test ratio?
A more severe test of a businesses capabilities in meeting its debts, as it excludes stock
What’s the desirable acid test ratio?
A value of 1 is accepted as normal
Lower may become a problem as they might not be able to pay back all their debts
Higher means their not using money effficently
How to work out acid test ratio?
current assets (- stock)
———————————
current liabilities
What is the gearing ratio?
Measures the proportion of the assets invested in a business that are financed by long term borrowing
Measures the long term financial stability of the business
What’s the normal gearing ratio?
50% > highly geared
25% - 50% normal
25% < low gearing
How to work out the gearing ratio
non-current liabilities
——————————
capital employed
What does gearing mean?
The proportion of finance that is provided by debt relative to all long term finance
How can gearing be improved?
Reducing gearing - improving profits, repaying long term loans, retaining profits rather than paying dividends
Increasing gearing - focusing on growth, converting short term debt into long term loans
How can ratios be used to make business decisions?
• Can help show whether a business can afford to make various decisions , whereas investment appraisal/decision trees help decide whether decisions are worthwhile
• Using working capital eg cash, will worsen the liquidity. borrowing from bank will increase gearing ratio
selling assets = good for liquidity & GR
