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business > unit 5 > Flashcards

unit 5 Flashcards

1
Q

what is revenue

A

the money received from sales of goods or service

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2
Q

calculation for revenue

A

selling price x items sold

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3
Q

what are fixed costs

A

cost that don’t change directly with the level of output

they will increase as the firm grows

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4
Q

what are variable costs

A

costs that change directly with output

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5
Q

formula for total costs

A

total fixed costs + total variable costs

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6
Q

why is profit important

A

reinvested
keep share holders happy (dividends)
pay taxes
attract shareholders

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7
Q

what tax do business have to pay

A

corporation tax

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8
Q

how much is corporation tax

A

20%

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9
Q

what are overheads

A

the costs of a business that don’t directly contribute tp the cost of making the product of preforming the service.

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10
Q

what’s cashflow

A

the money coming in and out of the business

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11
Q

what’s the main reasons business fails

A

cashflow

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12
Q

examples of cashflow

A

cash sales
grants
loands
share capital invested
intrest on banks

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13
Q

examples of cash outflows

A

payment to suppliers
wages and salaries
tax on profits
intrest on loan and overdraft
dividends to share holders

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14
Q

what is meant by cashflow problems

A

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

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15
Q

main causes of cash flow problems

A

low profits
too much production capacity
excess inventories held
allowing customers to take their time paying you
overtrading, business growing to fast
unexpected change in the business
seasonal demand

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16
Q

problems with allowing customers too much credit

A

late payment is a common problem
the debt may go ‘bad’

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17
Q

problems with too much stock

A

if its food it can go out of date
products can spoil

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18
Q

problems with overtrading

A

keen to open new outlets
pay rent in advance, shop fitting, stock

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19
Q

problems with seasonal demand

A

item you sell might only be wanted at one point in a year

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20
Q

what is debt factoring

A

sells its debts to a third party company who then makes profit off debt. (company is owed 100,000 third party pays 80,000 and keep 20,000, debt company pays full 100,000)

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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.

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22
Q

what’s a contingency fund

A

a reserve of money set aside to cover possible unforeseen future expenses

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23
Q

why produce a cash flow forecast

A

advanced warning of cash shortages
make sure business can afford to pay suppliers and employees

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24
Q

problems with cash flow forecasts

A

-sales prove lower then expected
-customers don’t pay on time
-costs prove higher then expected
-imprudent (unwise) cost assumptions

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25
Q

what is working capital

A

money available to a company for day-to-day operations

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26
Q

what do effective working capital management focuses on

A

inventories, debtors, creditors

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27
Q

how to improve working capital (debtors)

A

amounts owed by customers

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28
Q

how to improve working capital (creditors)

A

amounts owed to suppliers

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29
Q

how to improve working capital (inventories)

A

cash tied unpin raw materials, work in progress and finished goods

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30
Q

ways to manage amounts owed by customers

A

-credit control
-selling off debts to debt factors
-cash discounts for prompt payment
-improve record keeping

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31
Q

ways to improve the cash position (short term)

A

-reduce current assets (stock, debtors)
-increase current liabilities (delay payments)
-sell surplus fixed assets

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32
Q

ways to improve the cash position (long term)

A

-increase equity finance
-increase long term liabilities
-reduce net outflow on fixed assets

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33
Q

difficulties improving cashflows

A

-not be babe to reduce stock levels
-gaining access to sources of finance
-cost of finance (interest charged)
-analyse firms performance (where its gone wrong)
-impact on brand imagine (location change)
-short-term effects long-term (cheaper suppliers = impact quality of product =poor image and lower future sales)

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34
Q

what does a fixed costs line/graph look like

A

straight lines/steps

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35
Q

what does a variable costs line/graph look like

A

diagonal

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36
Q

how to measure contribution

A
  • total contribution
  • contribution per unit
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37
Q

what’s total contribution

A

difference between total sales revenue and the total variable costs

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38
Q

breakeven output formula

A

contribution per unit (£)

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39
Q

total contribution formula

A

total sales - total variable costs

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40
Q

formula for contribution per unit

A

selling price - variable cost per unit

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41
Q

3 ways to calculate breakeven

A
  • table
  • graph
  • formula
42
Q

breakeven key assumptions

A
  • selling price stay same, regardless
    amount produced
  • variable cost vary in direct proportion
    to output (variable cost per unit is the
    same)
  • all output is sold
  • fixed costs don’t vary with output
    (they stay the same)
43
Q

margin of safety formula (MOS)

A

actual output - break-even output

44
Q

what does margin of safety show (MOS)

A

how much output you can afford to lose without a loss

45
Q

how to change breakeven point

A
  • increase/decrease price
  • increase/decrease price
  • increase/decrease costs
46
Q

strengths of breakeven analysis

A
  • focuses on what output is required
    before a business reaches profitability
  • helps management & finance-
    providers better understand the
    viability and risk of a business or
    business idea
  • MOS 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
47
Q

what is a financial objective

A

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

48
Q

benefits of using financial objectives

A
  • a focus for the entire business
  • important measure of success or
    failure to a 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
49
Q

how does cash flow differ from profit

A
  • timing
  • ways fixed assets are accounted for
  • cash flows arising from the way the
    business is financed
50
Q

what is a fixed asset

A

a long-term tangible piece of property or equipment that a firm owns and uses in its operations to generate income (house, land)

51
Q

what are the three types of profit are called

A
  • gross profit
  • operating profit
  • profit for the year
52
Q

why do businesses have three types of profit

A

to analyse how each part of the business is doing

53
Q

types of revenue objectives

A
  • revenue growth
  • sales maximisation
  • market share
54
Q

what is cost minimisation

A

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

55
Q

key benefits of effective cost minimisation

A
  • lower unit costs
  • higher gross profit margin
  • higher operating profits
  • improved cash flow
  • higher ROI
56
Q

types of operating objectives

A
  • specific level of profit
  • rate of probability
  • profit maximisation
  • exceed industry or market profit
    margins
57
Q

possible cash flow objectives

A
  • reduce borrowings to target level
  • minimise interest costs
  • reduce seasonal swings in cashflow
  • reduce amounts held in inventories
58
Q

what is business investment

A
  • buy machinery, IT, buildings
  • buy businesses (takeover)
  • helps boost profits
59
Q

what are the two common investment objectives

A
  • level of capital expenditure (5mil a
    year/5% of revenue)
  • ROI
60
Q

what are the two parts to capital structure

A
  • equity
  • debt
61
Q

what is equity

A
  • amount invested by the owners
  • she capital, retained profit
62
Q

what is debt

A
  • finance provided to the business by
    external parties
  • bank loan, other long-term debt
63
Q

what is the debt/equity ratio

A

debt 200
——————- X 100 = 25%
equity 800

64
Q

reasons for higher equity in the capital structure

A
  • where there is greater business risk
  • where more flexibility required
65
Q

reasons why high levels of debt can be an objective

A
  • where interest rates are very low
  • where profits and cash flows are
    strong (debt paid easily)
66
Q

internal influences on finical objectives

A
  • business ownership
  • size and status of the business
  • other functional objectives
67
Q

external influences on finical objectives

A
  • economic conditions
  • competitors
  • social and political change
68
Q

what is a budget

A

financial plan for the future concerning the revenues and costs of a business

69
Q

what uses does budgets have in management

A
  • motivate staff
  • establish targets
  • communicate targets
  • forecast outcomes
  • assign responsibility
70
Q

principles of good budgeting

A
  • responsibilities clearly defined
  • performance is monitored
  • corrective action
71
Q

what are the two main approaches to budgeting

A
  • historical
  • zero
72
Q
A
73
Q
A
74
Q

how is a profit budget constructed

A
  • analyse Markey
  • draw up sales budget
  • draw up cost budget
75
Q

what is income budget

A
  • shows the budgeted income for a
    business and the sources
  • help firm to plan its workforce and
    operations
  • plan its expenditure based on
    requirements to meet demand
76
Q

what are the three main types of budgeting

A
  • income budget
  • expenditure budget
  • profit budget
77
Q

what are two key sources of information for budgets

A
  • finance performance in past periods
  • market research
78
Q

what is expenditure budgeting

A
  • shows the budgeted expenditure
  • include a range of different
    expenditure including, raw materials,
    stand, rent, insurance
79
Q

what is profit budget

A
  • important to ensure the firm makes
    profit
  • viewed as a full year to remove
    seasonal impacts on demand
80
Q

what is the profit budget formula

A

income budget - expenditure budget

81
Q

methods of setting budgets

A
  • budgeting according to company
    objectives
  • budgeting according to competitors
    spending
  • setting the budget as a percentage of
    sales revenue
  • budgeting according to last years
    budget allocation
  • zero budgeting
82
Q

what is zero budgeting

A

budgets start at zero and budget holders must justify why any expenditure is necessary before it is approved. budgets then set based on the strength of the justification linked to company objectives

83
Q

advantages of of zero budgeting

A
  • encourages more thorough planning
    and consideration about spending
  • helps identify changes in an
    organisation needs and ensures those
    areas of the business that are growing
    and need more finance get it
  • helps save money by cutting costs
84
Q

disadvantages of zero budgeting

A
  • can e very time consuming for budget
    holders
  • managers who are better at
    negotiating or presenting may acquire
    bigger budgets despite needs of other
    departments
85
Q

difficulties in budgeting accurately

A
  • sales forecasting
  • costs
86
Q

reasons for setting budgeting

A
  • helps to gain investment
  • financial control
  • monitoring and review
  • allows firms to established their
    priorities
  • improving staff performance and
    better accuracy
  • assign responsibility
87
Q

problems of setting budgets

A
  • imposed budgets
  • research problems and accuracy
  • unforeseen changes
  • time taken in setting budgets
88
Q

benefits of budgeting

A
  • motivate staff
  • SMART objectives
  • improve efficiency
  • encourage carful planning - company
    performance
89
Q

drawbacks of budgeting

A
  • allocations incorrect + unfair
  • difficult to monitor fairly
  • they may be inflexible
90
Q

definition of variance analysis

A

calculating and investigating the differences between actual results and the budget

91
Q

variance analysis formula

A

budget figure - actual figure

91
Q

what is favourable variance

A

positive - better then expected

92
Q

what is adverse variance

A

negative - worse then expected

93
Q

possible causes of favourable variances

A
  • stronger market demand
  • selling prices increased
  • competitor weakness - higher sales
  • better then expected productivity
94
Q

possible causes of adverse variances

A
  • unexpected events (covid)
  • over-spends by budget holders
  • sales forecast prove over-optimistic
  • market conditions, selling price lower
95
Q

do variances matter? it depends on….

A
  • was the variance foreseen
  • size
  • cause
  • wether its a temporary problem or -
    long term
96
Q

what is management by exception

A

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

97
Q

what should management do with variance

A
  • act only if the variance is outside an
    agreed margin - don’t waste time
  • investigate the cause of a significant
    variance
  • was it avoidable or not
  • act to remedy the problem
98
Q

problems and limitations of budgets

A
  • only as good as the data being used
  • lead to inflexibility in decision making
  • need to change as circumstances
    change
  • take time to complete and manage
  • result in short-tern decision to keep
    within the budget
99
Q

behavioural implications of budgets

A
  • demotivating
  • set unrealistic targets
  • departmental rivalry
  • spending put to budget, use it or lose
    it

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