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Business > Unit 5 > Flashcards

Unit 5 Flashcards

1
Q

types of profit (not on it)

A

gross profit: indication of financial performance by deducting direct costs
operating profit: all trading activities minus the costs associated
profit for the year: measure of all profits

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2
Q

income statement

A

records a business’s sales rev over trading period + all relevant costs incurred as well as the business’s profit or loss

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3
Q

direct costs

A

costs allocated to a particular product or area of the business eg raw materials

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4
Q

indirect costs

A

costs related to all aspects of business’s activities eg maintenance costs

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5
Q

investment

A

purchase of assets eg machinery or property that will be used for a considerable amount of time

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6
Q

What are the negatives of revenue objectives? (not on it)

A

Don’t necessarily increase a business’s profits
Revenue objectives which entail reducing prices to increase revenue can be risky as competitor may respond + reduce prices

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7
Q

Capital expenditure

A

Spending undertaken by businesses to purchase non currents assets eg vehicles. Another term for investment

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8
Q

Return on investment

A

= profit from the investment / capital invested in the project x 100
(High fig preferable)

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9
Q

Capital structure (not on it)

A

Refers to the way in which a business has raised the capital it requires to purchase assets

two parts : debt + equity

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10
Q

What different types of budgets are there?

A
  • revenue or earnings -> includes expected level of sales + likely the selling price of the product
  • Expenditure -> essential for the process of production
  • Profit -> important for managers + of interest of many of businesses stakeholders
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11
Q

Favourable vs adverse variance

A

Favourable when the different between the actual + budgeted figs will result in the business enjoying higher profits than show in the budget
Adverse when the difference between the figs in the budget + actual figures will lead to firms profits being lower than planned

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12
Q

What are the reasons for setting budgets?

A
  • helps to gain investment or finance -> banks + potential investors will want to see accurate budgets + business plans
  • Financial control
  • Monitoring + review -> can establish priorities
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13
Q

What are the benefits in budgeting?

A
  • provide direction -> motivate staff
  • SMART objectives -> measure performance against
  • Improve efficiency by eliminating waste + over spending
  • Encourage careful planning -> improves performance -> gives some accountability
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14
Q

Cash flow forecasts

A

State the inflows + outflows of cash that the mangers of a business expect over some future period

  • used to make sure always have enough money to pay suppliers + employees as they can arrange loan or overdraft in time
  • they are shown to banks to try get loans
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15
Q

Why do managers forecast the cash flow?

A
  • to support applications for loans -> banks more likely to lend if they have evidence
  • To help avoid unexpected cash flow crises -> can help to ensure the business does not suffer from periods where they are short of cash + unable to pay debts -> CFF can identify times when this might be the case, managers prepare
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16
Q

What is meant by a cash flow problem?

A

When a business does not have enough cash to be able to pay its liabilities

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17
Q

Breakeven output =

A

fixed costs/ contribution per unit

The level of output or production at which totals cost exactly equal revenue from sales

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18
Q

Contribution

A

The difference between revenue + variable costs

what the business needs to achieve in order to first cover its fixed costs + thereafter make a profit

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19
Q

To calculate the break even point what does a manager need?

A
  • the selling price of the product
  • The variable cost of producing a single unit of that product
  • fixed costs associated w product
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20
Q

What assumptions do you have to make when doing break even analysis?

A
  • selling price per unit stays the same
  • Variable costs vary in direct proportion to output
  • All output is sold
  • Fixed costs do not vary with out put
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21
Q

Profit margin

A

A ratio that expresses a business’s profits as a % of its revenue over some trading period

eg Gross profit margin
= gross profit / revenue x 100

Operating profit margin
= operating profit / sales revenue x 100

Profit for the year margin
= profit for the year / revenue x 100

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22
Q

Why do businesses need short term finances?

A

pay outstanding bills

Overcome temp cash shortages

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23
Q

What are internal and external sources of short term finance?

A

retained profits + overdrafts, debt factoring

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24
Q

What are internal and external sources of long term finance?

A

retained profits, sales of assets + bank loans, debentures, venture capital + share capital

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25
Q

Positives and negatives of using retained profit?

A

+ avoid pay interest on a loan -> avoids heavy interest charges
+ Avoid need for a company to sell further shares, enabling shareholders to retain control
- opportunity costs -> lose out from not using elsewhere
- Shareholders unhappy as receive lower dividend

26
Q

Benefits of debt factoring?

Negatives?

A

+ immediate cash provided by the factor means that the firm is likely to have lower overdraft requirements + will pay less interest
+ Factoring means businesses receive the cash from their sales more quickly
- reduce or even eliminate business’s profit margin, if it is small
- Customers may be aware that if debts are factored -> lose faith in supplier

27
Q

Share capital is source of finance for both Ltd and Plc, in the uk why is sit easier to sell shares for a plc?

A
  • sell on stock exchange. Efficient international market which brings together buyers + sellers + sets prices
  • Plc do not need permission of other shareholders to sell shares + existing shareholders can sell freely
28
Q

What are factors that contribute to cash flow difficulties?

LOAPI

A
  • lack of planning by managers
  • Over trading
  • Allowing too much trade credit
  • Poor credit control
  • Inaccurate cash flow forecasting
29
Q

Methods of improving cash flow problems?

INODA

A
  • Improved control of working capital
  • Negotiate improved terms for trade credit
  • Offer less trade credit
  • Debt factoring
  • Arrange short term borrowing
30
Q

Methods to improve profits:

A
  • Reduce costs of production but may result in lower quality
  • Increase prices -> may result in customers looking for alternative options
  • Improve the business’s efficiency
31
Q

Methods of improving cash flow and the costs associated:

A
  • Improved control of working capital -> employment of additional staff -> will increase costs
  • Negotiate improved terms for trade credit -> difficult for a firm w poor payment record to achieve
  • Offer less trade credit -> customers may move to other businesses offering more favourable trade credit terms. Prices may be lowered in compensation
32
Q

what is debt?

A

finance provided to the business by external parties eg bank loans

33
Q

what is equity?

A

amount invested by the owners of the business eg share capital

34
Q

bank loans

A

medium term, fixed period, rate of interest is fixed, good for assets eg machinery
+ lower interest than bank overdraft
+ no dividends or control given away
- start ups + small businesses often excluded
- repayments can be difficult if cash isn’t coming in quickly enough

35
Q

bank overdraft

A

short term finance, helps businesses handle seasonal fluctuations in cash flow
+ flexible
+ only pay interest on what they use
- can be withdrawn at short notice
- charge high rates of interest, unsuitable for LT

36
Q

factoring

A

short term finance, a business can raise cash by selling their invoices to a third party at a discount
+ receivables turned into cash quickly
- high cost associated (discount)
- customers may feel relationship has changed

37
Q

total contribution =

A

total revenues less total variable costs

contribution per unit x no. of units sold

38
Q

contribution per unit =

A

selling price per unit less variable costs per unit

39
Q

financial objectives (not on it)

A

revenue, cost, profit
set by finance ministers, consistent t w functional objectives
+ can improve co-ordination between teams, acts as a focus for decision making + allows shareholders to judge investments

40
Q

capital structure (not on it)

A

the way a business raises capital to purchase assets

objectives -> set a debt to equity ratio or to decrease proportion of debt in their LT funding

41
Q

internal factors influencing objectives (not on it)

A
  • overall objectives
  • status of the business
  • other functions
42
Q

external factors influencing objectives (not on it)

A

competitors, economy, shareholders

43
Q

Gross profit = (not on it)

A

sales rev - cost of sales

44
Q

operating profit = (not on it)

A

sales rev - cost of sales - operating expense

45
Q

profit for the year =(not on it)

A

operating profit + other profit - net finance cost - tax

46
Q

budgeting

A

a financial plan for future earnings + spendings
+ help to achieve targets, control costs, to review decisions
- can cause rivalry in departments, can be restrictive, time consuming

47
Q

what factors cause variance?

A

external eg competitor behaviour, changes in economy

internal eg efficiency levels, over or underestimate, selling price

48
Q

small variances

A

aren’t a problem eg favourable ones can motivate staff

49
Q

large variance

A

can demotivate either task is impossible (adverse) or don’t see the need to worker harder (favourable)

50
Q

break-even output is

A

the level of sales a business needs to cover its costs

51
Q

break-even point is

A

when costs = revenue

when costs > revenue = business is making a loss
when costs < revenue = business is making a profit

52
Q

margin of safety =

A

actual output - breakeven output -> allows the business to make decision

53
Q

venture capital

A

funding from professional inventors who provide expertise but take a % of the business

54
Q

share capital

A

selling shares either on stock market or within the business
+ doesn’t need to be paid back
- expect dividends, less control

55
Q

working capital

A

day to day running costs

56
Q

creditors

A

people who are owed money

57
Q

payables

A

money the business owes

58
Q

debtors

A

people who owe the business money

59
Q

Strengths of breakeven analysis

A
  • focuses on what output is required before a business reaches profitability
  • Helps management better understand the risks of the idea
  • MOS shows how sales forecast can prove over optimistic before losses are incurred
60
Q

Limitations of breakeven analysis

A
  • unrealistic assumptions; products not sold at same price at different levels of output
  • sales are unlikely to be same as output
  • planning aid rather than decision making tool
  • most businesses sell more than one product
61
Q

What is credit control

A

Establishing credit limits for new customers, credit checking new + existing customers

Business (14 decks)

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