unit 5 Flashcards
1
Q
whats revenue
A
is the money received from sales of goods or services
2
Q
whats the calculation for total revenue
A
selling price x numbers of items sold
3
Q
what are fixed costs (FC)
A
cost that do not change directly with the level of output.
they will increase as a firm grows, for example rents a larger store, but will not go up by a set amount for each new unit made.
4
Q
what are variable costs (VC)
A
costs that change directly with output. they will increase by a set amount each time a new unit is made.
5
Q
whats the formula for totals costs
A
total fixed costs + total variable costs
6
Q
why is profit important
A
to be reinvested
to keep owners/shareholders happy
to help attract new shareholders to invest
to help obtain investments and bank loans
to pay taxes
7
Q
What tax do business have to pay
A
corporation tax
8
Q
how much is corporation tax
A
20%
9
Q
what are overheads
A
the costs of a business that do not directly contribute to the cost of making the product of performing the service.
10
Q
whats cashflow
A
the movement of cash into and out of a business
11
Q
whats the main reason businesses fail
A
cash flow
12
Q
examples of cash inflows
A
cash sales
receipts from trade debtors
sale of fixed assets
interest on bank balances
grants
loans from bank
share capital invested
13
Q
examples of cash outflow
A
payments to suppliers
wages and salaries
payments for fixed assets
tax on profits
interest on loans and overdrafts
dividends paid to shareholders
repayment of loans
14
Q
what is meant by ‘cash flow problem’
A
when a business does not have enough cash to be able to pay its liabilities
15
Q
main causes of cash flow problems
A
- low profits or (worse) losses
- too much production capacity
- excess inventories held
- allowing customers too much credit and too long to pay
- overtrading, growing business to fast
- unexpected change in the business
- seasonal demand
16
Q
what are ‘trade debtors’
A
they owe you money
17
Q
problems with allowing customers too much credit
A
late payment is a common problem the payment may go ‘bad’
18
Q
problems with too much stock
A
if its food it can go out of date
the excess stock could of been spent on investments.
19
Q
what is overtrading
A
when a business expands too quickly without having the financial resources to support such a quick expansion
20
Q
what is debt factoring
A
is when a business sells its accounts receivables to a third party at a discount, enabling companies to immediately unlock cash tied up in unpaid invoices without having to wait the usual payment terms. Debt factoring is basically another term used for invoice factoring.
21
Q
what is selling lease back
A
a sale and leaseback is where a company sells commercial property which they own and occupy to a third party who then agrees to simultaneously lease the Property back to the company on completion of the transfer so that they can remain in the property.
22
Q
whats a contingency fund
A
a reserve of money set aside to cover possible unforeseen future expenses
23
Q
why produce a cash flow forecast
A
- advanced warning of cash shortages
- make sure that the businesses can
afford to pay suppliers and employees - spot problems with customer payments
24
Q
common problems with cash flow forecast
A
sales prove lower than expected
customers do not pay up on time
costs prove higher than expected
imprudent cost assumptions
25
whats working capital
money available to a company for day to day operations
26
how how to manage amounts owned by customers
credit control
selling of debts to debt factors
cash discounts for prompt payment
improved record keeping
27
ways to improve cash position (short term)
short term
- reduce current assets (stock and debtors)
- increase current liabilities (delaying payments)
- sell surplus fixed assets
28
ways to improve cash position (long term)
long term
- increase equity finance
- increase long term liabilities
- reduce net outflow on fixed assets
29
what is breakeven
the point at which total cost and total revenue are equal
30
what are fixed costs
costs that don't change directly with output
31
what are variable costs
costs that change directly with output
32
total costs formula
fixed costs + variable costs
33
whats total contribution
the difference between the total sales revenue and the total variable costs
34
formula for contribution per unit
selling price - variable costs per unit
35
breakeven outputs forumla
fixed costs (£)
--------------------------------
contribution per unit (£)
36
contribution formula
total sales less total variable costs
37
what are the three ways of calculating break even
- a table
- a formula
- a graph
38
contribution per unit formula
selling price - variable cost per unit
39
what 4 things go on the break even chart
total revenue
total costs
fixed costs
break even
40
whats margin of safety (MOS) formula
actual output - break even output
41
what is margin of safety (MOS)
The different between the output and break even output on the break even chart
42
how to change break even point
- increase/decrease the price
- increase/decrease fixed costs
- increase/decrease variable costs
43
strengths of breakeven 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
44
limitations of break even analysis
- unrealistic assumptions, products are not sold at the same price at different levels of output; fixed costs do vary when output changes
- sales are unlikely to be the same as the output - there may be some build up of stocks or wasted output to
- variable costs do not always stay the same. for example as output rises the business may benefit from being able to buy inputs at a lower price
- most businesses sell more than one product
- a planning aid rather than a decision making tool
45
break even analysis key assumptions
- selling price per unit stays the same, regardless of amount produced
- variable costs vary in direct proportion to output
- all output is sold
- fixed costs do not vary with output, they stay the same
46
what is financial objective
a specific goal or target of relating to the financial performance, resources and structure of a business
47
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 context for making investment decisions
48
what does net mean
before tax (overall)
49
where does cash flow differ from profit
- timing differences
- the way fixed assets are accounted for
- cash flows arising from the way business is financed
50
whats depreciation
where it loses money over time
51
what are the three types of profit
- gross profit
- operating profit
- profit for the year
52
whats gross profit
profit where the cost of sales has been taken off
53
whats operating profit
profit where cost of sales and overheads being taken off
54
whats profit for the year
profit where you take of all cost of sales, overheads, tax etc
55
whats the definition of cost sales minimisation objectives
cost minimisation to achieve the most cost-effective way of delivering goods ands services to required level of quality
56
what are the revenue objectives
- revenue growth (percentage or value)
- sales maximisation
- market share
57
key benefits of effective cost minimisation
- lower unit costs (competitiveness)
- higher gross profit margin
- higher operating profits
- improved cash flow
- higher return on investment
58
the most common profit objectives are
- specific level or profit
- rate of profitability
- profit maximisation
- exceed industry or market profit margins
59
possible cash flow objectives
- reduce borrowings to target levels
- minimise interest costs
- reduce amount held in inventories or owed by customers
- reduce seasonal swings in cash flows
- net cash flow as a percentage of net profit (eg 90% of operating profit)
60
what is business investment
- capital expenditure on items such as product machinery, IT systems, buildings etc
- can also be the purchase of other business (takeovers) or brands
- investments is intended to help generate a return (profit) over more than one year
61
two common investment objectives
level of capital expenditure
- set at either an absolute amounts or as a percentage of revenues
return on investment
- usually set as a target % return, calculated by dividing operating profit by the amount of capital invested
62
what is the capital structure of a business
the capital of a business represents the finance provided to its to enable it to operate over the long term. there are two parts to the capital structure which are EQUITY AND DEBT
63
whats equity
the amount of money that a company's owner has put into it or owns
64
whats debt
the sum of money that is borrowed for a certain period of time and is to be return along with the interest
65
debt to equity ratio formula
debt
--------- x100
equity
66
capital structure objectives
reasons for higher equity in the capital structure
- where is greater business risk
- where more flexibility required
reasons why high levels of debt can be an objective
- where interest rates are very low
- where profits and cash flows are strong; so debt can be repaid easily
67
internal influences on financial objectives
- business ownership
- size and status of the business
- other functional objectives
68
external influences on financial objectives
- economic conditions
- competitors
- social and political change
69
what is a budget
a financially plan for the future that uses costs and revenue
70
what is a person responsible for a budget called
a budget holder
71
uses of budgets in management
- forecast outcomes
- improve efficiency
- monitor performance
- establish priorities
- motivate staff
72
principles of good budgeting
- managerial responsibilities and clearly defined
- manager have a responsibility to adhere to their budgets
- performance is monitored against the budget
- corrective action is taken if results differ significantly from the budget
- unaccounted for variances are investigated
73
two main approaches to budgeting
historical budgeting
- use last years figures as the basis for the budget
- realistic in that it is based on actual results
- however circumstances may have changed (eg new products, lost customers)
- doesn't encourage efficiency
zero budgeting
- budgeting costs and revenues are set to zero
- budget is based on new proposals for sales and costs ie built from the bottom up
- makes budgeting more complicated
74
whats income budget
represents the revenue you are projected to receive over the course of the fiscal year, and it is compared to your Income Actuals to track progress
75
whats expenditure budget
shows the revenue and capital disbursements of various ministries/departments and presents the estimates in respect of each under 'Plan' and 'Non-Plan'
76
whats profit budget
a summary of expected income and expenses over a specified financial period.
77
advantages of setting budgets
- helps create financial stability
- improves efficiency
- provides direction
- improves planning and control
78
disadvantages of setting budget
- time consuming
- can be inflexible
- can create competitions and conflict between teams or departments
- if targets are unrealistic, employees could become stressed and under pressure
79
what a budget is constructed
analyse market
to
draw up sales budget
to
draw up cost budget
80
two key sources of information for budgets
finical performance in previous periods
- particularly for established businesses
- lots of relevant data likely to be available
market research
- trends in market size, growth, segmentation, product life cycles
- competitor activity
- customer feedback
81
what is income budget
- shows the budgeted income for a business and the sources
- will help a firm to plan its workforce and operations
- will allow a firm to plan its expenditure based on requirements to meet demand for example, order levels and staffing
- only an estimate
82
what is expenditure budget
- shows the budgeted expenditure for a business
- will include a range of different expenditure including raw materials, staff, marketing etc
83
whats the profit budgeting formula
income budget - expenditure budget
84
whats profit budget
- important to ensure the firm makes a profit
- should be viewed as a full year to remove seasonal impacts on demand
85
what are methods of setting budgets
- budgeting accord to company objectives
- budgeting according to competitors spending
- setting the budget as a percentage of sales revenue
- budgeting according to last years budget allocation
86
whats zero budgeting
- all budgets start at zero and budget holders must purify why any expenditure is necessary before it is approved. Budgets are then set based on the strength of the justification linked to company objectives
87
advantages of zero budgeting
- encourages more thorough planning and consideration about spending
- helps to identify change in an organisations needs to ensure those areas of the business that are growing and need more finance get it
- helps to save money by cutting costs where managers are unable to justify their spending
88
disadvantages of zero budgeting
- it can be very time consuming for budget holders
- managers who are better at negotiating or presenting may acquire bigger budgets despite needs of other departments
89
reasons for setting budgets
- helps to gain investment or finance
- financial control
- monitoring and review
- allows firms to establish their priorities
- improving staff performance and better accuracy
- assign responsibility
90
benefits of budgets
- they provide direction and co-ordination which may motivate staff to work towards company objectives
- budgets can act as SMART objectives to measure performance against
- they improve efficiency by eliminating waste and overspending
- they encourage careful planning which improves comany performance
91
drawbacks of budgets
- allocations may be incorrect and unfair
- short term savings may be made to meet budgets that are not in the interests of the firm in the longer term
- they are difficult to monitor fairly
- they may be inflexible
92
whats the definition of variance analysis
calculating and investigating the differences between the actual results and the budget
93
variance formula
budget figure - actual figure
94
whats favourable variances
when costs are lower than expected or revenue is higher.
95
whats adverse variances
actual figures are worse then budget figure
96
possible causes of favourable variances
- stronger market demand than expected = higher actual revenue
- selling price increased higher than budget
- cautious sales and cost assumptions
- competitor weakness leading to higher sales
- better than expected productivity or efficiency
97
possible causes of adverse variances
- unexpected events lead to unbudgeted costs
- over spends by budget holders
- sales forecasts prove over optimistic
- market conditions (eg competitor actions) mean selling prices are lower than budget
98
whats management by exception
focusing on activity that require attention, not those that are running smoothly
99
what should management do with a variance
- act only if the variances is outside an agreed margin, don't waste time
- investigate the cause of a significant variance
- was it avoidable or unavoidable?
- act to remedy the problem, if appropriate
100
problems and limitations of budgets
- are only good as the data being used
- can lead to inflexibility in decision making
- need to be changed as circumstances change
- take time to complete and manage
- can result in short term decisions to keep within the budget
