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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
Positives and negatives of using retained profit?
+ 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
Benefits of debt factoring? | Negatives?
+ 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
Share capital is source of finance for both Ltd and Plc, in the uk why is sit easier to sell shares for a plc?
- 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
What are factors that contribute to cash flow difficulties? LOAPI
- lack of planning by managers - Over trading - Allowing too much trade credit - Poor credit control - Inaccurate cash flow forecasting
29
Methods of improving cash flow problems? INODA
- Improved control of working capital - Negotiate improved terms for trade credit - Offer less trade credit - Debt factoring - Arrange short term borrowing
30
Methods to improve profits:
- 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
Methods of improving cash flow and the costs associated:
- 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
what is debt?
finance provided to the business by external parties eg bank loans
33
what is equity?
amount invested by the owners of the business eg share capital
34
bank loans
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
bank overdraft
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
factoring
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
total contribution =
total revenues less total variable costs contribution per unit x no. of units sold
38
contribution per unit =
selling price per unit less variable costs per unit
39
financial objectives (not on it)
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
capital structure (not on it)
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
internal factors influencing objectives (not on it)
- overall objectives - status of the business - other functions
42
external factors influencing objectives (not on it)
competitors, economy, shareholders
43
Gross profit = (not on it)
sales rev - cost of sales
44
operating profit = (not on it)
sales rev - cost of sales - operating expense
45
profit for the year =(not on it)
operating profit + other profit - net finance cost - tax
46
budgeting
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
what factors cause variance?
external eg competitor behaviour, changes in economy | internal eg efficiency levels, over or underestimate, selling price
48
small variances
aren't a problem eg favourable ones can motivate staff
49
large variance
can demotivate either task is impossible (adverse) or don't see the need to worker harder (favourable)
50
break-even output is
the level of sales a business needs to cover its costs
51
break-even point is
when costs = revenue when costs > revenue = business is making a loss when costs < revenue = business is making a profit
52
margin of safety =
actual output - breakeven output -> allows the business to make decision
53
venture capital
funding from professional inventors who provide expertise but take a % of the business
54
share capital
selling shares either on stock market or within the business + doesn't need to be paid back - expect dividends, less control
55
working capital
day to day running costs
56
creditors
people who are owed money
57
payables
money the business owes
58
debtors
people who owe the business money
59
Strengths of breakeven analysis
- 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
Limitations of breakeven analysis
- 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
What is credit control
Establishing credit limits for new customers, credit checking new + existing customers

Business (14 decks)

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