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buisness > unit 5 > Flashcards

unit 5 Flashcards

1
Q

what is revenue

A

(turnover, sales) money received from the goods and sales

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2
Q

how do you work out revenue

A

total revenue= selling price x number of items sold

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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.

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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

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5
Q

what are variable costs

A

costs that change directly with ouput.

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6
Q

what is the formula for total costs

A

total = total fixed costs + total variable costs

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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

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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

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9
Q

can you have too much cash

A

extra Cash should be invested back into the business, to maximise the profits

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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.

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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

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12
Q

examples of cash outflows

A

wages and salaries
payment to suppliers
tax on profits
repayment on loans
dividends payed by shareholders

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13
Q

examples of cash inflows

A
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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

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15
Q

what are trade debtors

A

customers who buy on credit

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16
Q

why do businesses offer credit

A

good way of building sales, but late payments is a common problem

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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.

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18
Q

what is a benefit of bulk buying

A

lower purchasing prices

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19
Q

what is overtrading and example

A

where a business expands too quickly, putting pressure on short term finance. E.g retail chains

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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.

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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

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22
Q

what is working capital

A

money available to a company for a day to day operations

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23
Q

debtors

A

amounts owed by customers

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24
Q

creditors

A

amounts owed to suppliers

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25
Q

what is credit

A

more time (leeway)

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26
Q

what is trade credit used for

A

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

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27
Q

why is credit checking used

A

to check if the customer is loyal.

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28
Q

what are other ways of managing amounts owed by customers

A

selling of debts to debt factoring companies
credit control
cash discounts for prompt payments

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29
Q

what is credit control

A
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30
Q

how do you manage inventories

A
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31
Q

what are the ways of improving cash position (short and long term)

A

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.

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32
Q

what are the difficulties improving cash flow

A
  • 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.
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33
Q

what is short termism

A

Anything that benefits you now, but will make you suffer in the long term.

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34
Q

why would a fixed cost on a break-even chart not be true and how to overcome

A

fixed costs will increase

break-even chart will take a snippet of the graph

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35
Q

where does variable costs start on a break even

A

on the origin

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36
Q

what is contribution

A
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37
Q

what is the equation for total contribution

A

total revenue- total variable costs

also contribution per unit x no. unit sold

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38
Q

equation for contribution per unit

A

selling price per unit- variable cost per unit

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39
Q

what is break even output

A
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40
Q

equation for break even output

A

fixed costs/contribution per unit

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41
Q

what is the profit formula with contribution

A

contribution- fixed costs

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42
Q

what are the three methods of calculating break even

A

table
graph
formula

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43
Q

what is margin of safety (MOS)

A

the difference between actual output and break even

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44
Q

margin of safety formula

A

actual output- break-even output

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45
Q

why is it important to have a margin of safety

A

shows how much output you can afford to loose without making a loss

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46
Q

how to change break even point

A

increase price
decrease price
decrease variable costs

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47
Q

strengths of break even analysis

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 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.

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48
Q

what a financial objective

A

a specific goal or target of relating to the financial performance, resources and structure of a business.

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49
Q

what are the key benefits of using financial objectives

A

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.

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50
Q

return on investment calculation percentage

A

return on investment/cost of investment x100

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51
Q
A
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52
Q

how does cash flow differ from profit

A

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
Q

what are the three types of profit

A

gross profit
operating profit
profit for the year

54
Q

why are three profits needed

A

to analyse how each part of the business is doing

55
Q

what is gross profit

A

revenue-costs of sales

56
Q

what is operating profit

A

gross profit-overheads (administrative expenses)

57
Q

what is profit of the year

A

operating profit- finance/tax costs

58
Q

what are overheads

A

ongoing costs excluding direct costs

59
Q

revenue

A

sales during the period

60
Q

cost of sales

A

direct costs generating

61
Q

gross profits

A
62
Q

adminastrative expenses

A

coststhat companies incur to maintain daily operations.

63
Q

operating profit

A
64
Q

finance expenses
taxation
profit of the year

A
65
Q

what are the different types of revenue objectives

A

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
Q

what is cost minimisation objectives

A

aims to achieve the most cost- effective way of delivering goods and services to the required level of quality.

67
Q

benefits of effective cost minimisation

A

lower unit costs
higher gross profit margin
higher operating profits
improved cash floe
higher return on investment

68
Q

examples of profit objectives

A

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
Q

why is a strong cash flow beneficial

A

helps businesses to achieve other financial objectives by providing extra financial resources

70
Q

examples of possible cash flow objectives

A

-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
Q

what is business investment

A

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
Q

what are two common investment objectives

A

level of capital expenditure

return on investment

73
Q

what is the capital structure of a business

A

represents the finance provided to it to enable it to operate over the long-term there are two parts to the capital structure.

74
Q

what are the two parts of capital structure

A

Equity and debt

75
Q

what is equity

A

the amount invested by the owners of the business.
share capital
retained profits

76
Q

what is debt

A

the finance provided to the business by external parties

bank loans
other long-term debt

77
Q

formula for debt equity ratio

A

debt/equityx100

78
Q

reasons for higher equity in the capital structure

A

-where there is greater business risk (start up)
-where more flexibility required (e.g don’t have to pay dividends)

79
Q

reasons why high levels of debt can be an objective

A

-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
Q

what are the internal influences on financial objectives

A

business ownership
size and stature of the business
other functional objectives

81
Q

how would business ownership influence financial objectives

A

-venture capitalist investor would have a different relationship with a long-standing family ownership

82
Q

how would size and status of a business influence financial objectives

A

start-ups and smaller business might focus on survival, multinational businesses are much more focused on growing shareholder value.

83
Q

how would other functional objectives influence financial objectives

A

every fictional objective in a business has a financial dimension.

84
Q

what are the external influences on financial objectives

A

economic conditions
competitors
social and political change

85
Q

how would economic conditions have an impact on financial objectives

A

economic downturn forced many businesses to reappraise their financial objectives run favour of cost minimisation.

86
Q

what is a budget

A

a financially plan for the future that uses revenue and costs

87
Q

what is the person responsible for a budget called

A

a budget holder

88
Q

uses of budgets

A

-establish priorities
-turn objectives into practical reality
-provide direction
-improve efficiency
-motivate staff

89
Q

principles of good budgeting

A

managerial responsibilities are clearly defines
-performance is monitored against the budget
corrective action is taken if results differ significantly from the budget

90
Q

what are the two main approaches to budgeting

A

historical
zero

91
Q

what is historical budgeting

A

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
Q

at is zero budgeting

A

budgeted costs and revenues are set to zero
-budget is based n new proposals for sales and costs

93
Q

what is income budget

A

represents the revenue you receive over a fiscal year (April to April)

94
Q

what is expenditure budget

A

represents the revenue and capital disbursement of various departments.

95
Q

what is profit budget

A

a summary of elected income and expenses over a specified financial period.

96
Q

what are the advantages and disadvantages of setting budgets

A

-improves planning and control
-improves efficiency
-provides direction

disadvantages-
-time consuming
-inflexible not allow for certain circumstances

97
Q

how is a budget constructed

A

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
Q

sources of information for budgets

A

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
Q

what are the three main types of budget

A

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
Q

what is the different between the budget and actual income called

A

variances

101
Q

equation for profit budget

A

income budget-expenditure budget

102
Q

advantages of zero budgeting

A

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
Q

disadvantages of zero budgeting

A

-it can be very time consuming
-managers that are better at negotiating might receive greater budgets.

104
Q

reasons for setting budgets

A

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
Q

difficulties of budgeting accurately

A

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
Q

problems of setting budgets

A

imposed budgets
-research problems and accurately
-unforeseen changes

107
Q

drawbacks of budgeting

A

-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
Q

what is a contingency budget

A

to cover adverse variances, and unseen problems

109
Q

what is varience analysis

A

calculating and investigating the differences between actual results and the budget

110
Q

when do variances arise

A

when there is a difference between actual and budget figures

111
Q

favourable variances

A

better than expected

112
Q

adverse variances

A

worse than expected

113
Q

what are favourable variances

A

actual figures are better than budgeted figure

114
Q

what are adverse variances

A

actual figure worse than budget figure

115
Q

possible causes of favourable variances

A

stronger demand than expected- high revenue
-selling price increased higher than budget
-cautious sales and cost assumptions

116
Q

possible causes of adverse variances

A

unexpected costs or events
-over spend by budget holders
-sales forecast over-optimistic

117
Q

do variances matter

A

depends on the size, cause and whether it is a temporary problem.

118
Q

what is management by exemption

A

focusing on activities that require attention, not those that are running smoothly

119
Q

problems and limitations of budgets

A

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
Q

behavioural Implications of budgets

A

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
Q

what are payables

A

the debt owed by a business

122
Q

what are payable days

A

a measure of the average number of days taken to pay suppliers. average is 44 days

123
Q

equation for payables days

A

payables/revenue x365

124
Q

what is profitability

A

a measure of the financial performance of a business

125
Q

what are receivables

A

the amount owing to a firms debtors- current asset

126
Q

what are receivables days

A

the number of days it takes to convert receivables into cash

127
Q

receivables days-

A

receivables 365

128
Q

what t is return on capital employed

A

the return on investment and how efficient management uses capital to generate profits

129
Q
A

buisness (14 decks)

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