unit 5 Flashcards
1
Q
what is revenue
A
(turnover, sales) money received from the goods and sales
2
Q
how do you work out revenue
A
total revenue= selling price x number of items sold
3
Q
what is the difference between profit and revenue
A
revenue is the total amount of money from all the sales, whereas profit is the total amount - the of manufacturing and other expenses.
4
Q
what is fixed costs FC
A
costs that do not change directly with the level of output. e.g rent also known as FC
5
Q
what are variable costs
A
costs that change directly with ouput.
6
Q
what is the formula for total costs
A
total = total fixed costs + total variable costs
7
Q
why is profit important
A
to be reinvested into the firm
to keep owners/shareholders happy
to help attract new shareholders to invest
to help obtain investment and bank loans
to pay taxes
to avoid share prices drops
8
Q
why is cash flow important
A
it is the lifeblood of a business, needed for short term payments
if it runs out of cash, the business will fail
9
Q
can you have too much cash
A
extra Cash should be invested back into the business, to maximise the profits
10
Q
what is meant by a cash flow problem
A
the business does not have enough cash to be able to pay its liabilities.
11
Q
what are the main causes of cash flow problems
A
low profits
too much production capacity
excess inventories held (stock)
allowing customers too much credit and too long to pay.
overtrading- growing the business too fast
unexpected changes in the business.- covid
12
Q
examples of cash outflows
A
wages and salaries
payment to suppliers
tax on profits
repayment on loans
dividends payed by shareholders
13
Q
examples of cash inflows
A
14
Q
what are some examples of too much spending on capacity
A
spending too much on fixed assets
Made worse if short term finance is used
fixed assets are hard to turn back into cash in the short term
15
Q
what are trade debtors
A
customers who buy on credit
16
Q
why do businesses offer credit
A
good way of building sales, but late payments is a common problem
17
Q
why is too much inventory a bad thing
A
Excess stocks tie up cash
increased risk that stocks become obsolete, but there needs to be enough stock to meet demand. If the stock is food it can go out of date.
18
Q
what is a benefit of bulk buying
A
lower purchasing prices
19
Q
what is overtrading and example
A
where a business expands too quickly, putting pressure on short term finance. E.g retail chains
20
Q
why do you need to manage seasonal demand
A
production or purchasing usually in advance of seasonal peak in demand = cash outflows before inflows.
21
Q
what are the common problems with cash flow forecasting
A
can be based on false assumptions
- circumstances can change suddenly . cost can go up, machinery can break down, competitors can put their price up and down, affecting sales
22
Q
what is working capital
A
money available to a company for a day to day operations
23
Q
debtors
A
amounts owed by customers
24
Q
creditors
A
amounts owed to suppliers
25
what is credit
more time (leeway)
26
what is trade credit used for
to persuade the customer to be more loyal- not given to notoriously bad customers. Can persuade customers to stay with you even if there is competition
27
why is credit checking used
to check if the customer is loyal.
28
what are other ways of managing amounts owed by customers
selling of debts to debt factoring companies
credit control
cash discounts for prompt payments
29
what is credit control
30
how do you manage inventories
31
what are the ways of improving cash position (short and long term)
short term: reduce current assets(stocks/debtors)
increase current liabilities(delaying payments)
sell surplus fixed assets
Long term: increase equity finance
increase long term liabilities
reduce net outflow on fixed assets.
32
what are the difficulties improving cash flow
- small firms may find it difficult to renegotiate credit terms
-some firms may not be able to reduce their stock levels
- gaining access to sources of finance
-cost of finance
-find out what the cash flow problems are
-impact of brand image
-short term decisions making may impact on the business in the long term.
33
what is short termism
Anything that benefits you now, but will make you suffer in the long term.
34
why would a fixed cost on a break-even chart not be true and how to overcome
fixed costs will increase
break-even chart will take a snippet of the graph
35
where does variable costs start on a break even
on the origin
36
what is contribution
37
what is the equation for total contribution
total revenue- total variable costs
also contribution per unit x no. unit sold
38
equation for contribution per unit
selling price per unit- variable cost per unit
39
what is break even output
40
equation for break even output
fixed costs/contribution per unit
41
what is the profit formula with contribution
contribution- fixed costs
42
what are the three methods of calculating break even
table
graph
formula
43
what is margin of safety (MOS)
the difference between actual output and break even
44
margin of safety formula
actual output- break-even output
45
why is it important to have a margin of safety
shows how much output you can afford to loose without making a loss
46
how to change break even point
increase price
decrease price
decrease variable costs
47
strengths of break even analysis
-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 a sales forecast can prove over-optimistic before losses are incurred
-illustrates the importance of keeping fixed costs down to a minimum
-calculations are quick and easy.
48
what a financial objective
a specific goal or target of relating to the financial performance, resources and structure of a business.
49
what are the key benefits of using financial objectives
a focus for the entire business
-important measure of success or failure for the business
-reduce the risk of business failure
-provide transparency for shareholders about their investment
-help coordinate the different business functions
-key contact for making investment decisions.
50
return on investment calculation percentage
return on investment/cost of investment x100
51
52
how does cash flow differ from profit
timing differences
-sales to customers made on credit
-payments to suppliers
the way fixed assets are accounted for
-payment for fixed asset (machinery) = cash outflow
-cost of fixed assets = treated as an asset not a cost
-depreciation (when it loses value over time) charged as costs when the value of fixed assets is reduced.
cash flows arising from the way the business is financed
-inflows from shareholders, bank loans, factoring
-repayments of amounts loaned
-payment of dividends.
53
what are the three types of profit
gross profit
operating profit
profit for the year
54
why are three profits needed
to analyse how each part of the business is doing
55
what is gross profit
revenue-costs of sales
56
what is operating profit
gross profit-overheads (administrative expenses)
57
what is profit of the year
operating profit- finance/tax costs
58
what are overheads
ongoing costs excluding direct costs
59
revenue
sales during the period
60
cost of sales
direct costs generating
61
gross profits
62
adminastrative expenses
coststhat companies incur to maintain daily operations.
63
operating profit
64
finance expenses
taxation
profit of the year
65
what are the different types of revenue objectives
revenue growth- aiming to grow total revenues by 10%. Reach £1million in sales during a year.
sales maximisation - aim to maximise total sales- regardless of whether those sales are profitable
Market share- grow market share by 20%
66
what is cost minimisation objectives
aims to achieve the most cost- effective way of delivering goods and services to the required level of quality.
67
benefits of effective cost minimisation
lower unit costs
higher gross profit margin
higher operating profits
improved cash floe
higher return on investment
68
examples of profit objectives
specific level of profit-achieved an operating profit of £1m
rate of profitability- achieved at operating profit profit margin of 10% of revenues
profit maximisation- maximise the total profit for they year
exceed industry or market profit margins- achieve the highest gross or operating profit margin than key components
69
why is a strong cash flow beneficial
helps businesses to achieve other financial objectives by providing extra financial resources
70
examples of possible cash flow objectives
-reduce borrowings to target level
minimise interest costs
-reduce amounts held in inventories or owed by customers
-reduce seasonal swings in cash flows
-net cash flow as a percentage of net profit.
71
what is business investment
capital expenditure on items such as product machinery, IT systems, buildings etc.
can also be the purchase of other businesses or brands (takeovers).
-investment is intended to help generate a return over more than one year.
72
what are two common investment objectives
level of capital expenditure
return on investment
73
what is the capital structure of a business
represents the finance provided to it to enable it to operate over the long-term there are two parts to the capital structure.
74
what are the two parts of capital structure
Equity and debt
75
what is equity
the amount invested by the owners of the business.
share capital
retained profits
76
what is debt
the finance provided to the business by external parties
bank loans
other long-term debt
77
formula for debt equity ratio
debt/equityx100
78
reasons for higher equity in the capital structure
-where there is greater business risk (start up)
-where more flexibility required (e.g don't have to pay dividends)
79
reasons why high levels of debt can be an objective
-where interest rates are very low = debt is cheap to finance
-where profits and cash flows are strong; so debt can be repaid easily
80
what are the internal influences on financial objectives
business ownership
size and stature of the business
other functional objectives
81
how would business ownership influence financial objectives
-venture capitalist investor would have a different relationship with a long-standing family ownership
82
how would size and status of a business influence financial objectives
start-ups and smaller business might focus on survival, multinational businesses are much more focused on growing shareholder value.
83
how would other functional objectives influence financial objectives
every fictional objective in a business has a financial dimension.
84
what are the external influences on financial objectives
economic conditions
competitors
social and political change
85
how would economic conditions have an impact on financial objectives
economic downturn forced many businesses to reappraise their financial objectives run favour of cost minimisation.
86
what is a budget
a financially plan for the future that uses revenue and costs
87
what is the person responsible for a budget called
a budget holder
88
uses of budgets
-establish priorities
-turn objectives into practical reality
-provide direction
-improve efficiency
-motivate staff
89
principles of good budgeting
managerial responsibilities are clearly defines
-performance is monitored against the budget
corrective action is taken if results differ significantly from the budget
90
what are the two main approaches to budgeting
historical
zero
91
what is historical budgeting
use last year's figures as the basis for the budget
-realistic in that it is based on actual results
-but, circumstances may have changed
-does not encourage efficiency
92
at is zero budgeting
budgeted costs and revenues are set to zero
-budget is based n new proposals for sales and costs
93
what is income budget
represents the revenue you receive over a fiscal year (April to April)
94
what is expenditure budget
represents the revenue and capital disbursement of various departments.
95
what is profit budget
a summary of elected income and expenses over a specified financial period.
96
what are the advantages and disadvantages of setting budgets
-improves planning and control
-improves efficiency
-provides direction
disadvantages-
-time consuming
-inflexible not allow for certain circumstances
97
how is a budget constructed
analyse market- market size
-market share
-market prospects
draw up sales budget- Seles forecast
-new products
-price changes
draw up cost budget- based on sales
-allow for known changes in supplier prices
-include contingencies
98
sources of information for budgets
financial performance in previous periods
-lots of relevant data likely to be available
market research
-trends in market size, growth, segmentation
-competitor activity
-customer feedback.
99
what are the three main types of budget
income budget- expected revenue and sales, broken down into more detail.
expenditure budget- expected costs based on sales budget, overheads and other fixed costs
profit budget- based on the combined sales and cost budgets, of great interest of shareholders, may form basis for performance bonuses
100
what is the different between the budget and actual income called
variances
101
equation for profit budget
income budget-expenditure budget
102
advantages of zero budgeting
encourages more thorough planning and consideration about spending
-helps to identify changed in a an organisations needs and ensure those areas of the business are growing
-helps to save money by cutting
103
disadvantages of zero budgeting
-it can be very time consuming
-managers that are better at negotiating might receive greater budgets.
104
reasons for setting budgets
help to gain investment or finance- baks and potential investors will want to see accurate budgets are safe
-financial control-planned and researched budgets can control costs and avoid overspending
-monitoring and review- a firm can become more efficient and improve future performance by monitoring budgets, investigating variances, identifying areas of success
-allow firms to establish their priorities- finance can be allocated in different areas of the business depending on the objectives.
105
difficulties of budgeting accurately
sales forecasting- harder when market experiences rapid change
-start-up firms find it hard to estimate likely sales and revenues
-competitor actions difficult to predict
costs-always likely to be unexpected costs
-will vary depending on the sales budget.
106
problems of setting budgets
imposed budgets
-research problems and accurately
-unforeseen changes
107
drawbacks of budgeting
-allocations may be incorrect and unfair- particularly if imposed
-short term savings may be made to meet budgets that are not in the interests of the firm in the longer term, for example, finding cheaper raw materials
-they are difficult to monitor fairly
- they. may not be flexible
108
what is a contingency budget
to cover adverse variances, and unseen problems
109
what is varience analysis
calculating and investigating the differences between actual results and the budget
110
when do variances arise
when there is a difference between actual and budget figures
111
favourable variances
better than expected
112
adverse variances
worse than expected
113
what are favourable variances
actual figures are better than budgeted figure
114
what are adverse variances
actual figure worse than budget figure
115
possible causes of favourable variances
stronger demand than expected- high revenue
-selling price increased higher than budget
-cautious sales and cost assumptions
116
possible causes of adverse variances
unexpected costs or events
-over spend by budget holders
-sales forecast over-optimistic
117
do variances matter
depends on the size, cause and whether it is a temporary problem.
118
what is management by exemption
focusing on activities that require attention, not those that are running smoothly
119
problems and limitations of budgets
only as good as data of person putting the budget together
-can lead to inflexibility and decision making
-need to be changed as circumstances change
-time consuming
120
behavioural Implications of budgets
de-motivating if they are imposed, and unrealistic targets
-can contribute to department rivalry
-spend up to the budget to preserve it for next year
121
what are payables
the debt owed by a business
122
what are payable days
a measure of the average number of days taken to pay suppliers. average is 44 days
123
equation for payables days
payables/revenue x365
124
what is profitability
a measure of the financial performance of a business
125
what are receivables
the amount owing to a firms debtors- current asset
126
what are receivables days
the number of days it takes to convert receivables into cash
127
receivables days-
receivables 365
128
what t is return on capital employed
the return on investment and how efficient management uses capital to generate profits
129
