Y11 Finance Flashcards
1
Q
What is Sales Revenue?
A
The money a business receives for selling the goods and services it produces - the money from customers.
2
Q
Give the formula for Sales Revenue:
A
Sales Revenue =Quantity Sold X Selling Price.
3
Q
What are the 3 main methods of Increasing Sales:
A
1) Increase the selling price (to make more revenue) 2) Decrease the selling price (more will be sold)3) Increase the quantity sold without changing the price.
4
Q
The effect of a price change on Sales Revenue depends on…This is known as…
A
The amount sold - the demand.This is known as “the price elasticity of demand.”
5
Q
Products are either….(2)
A
Price ELASTIC.OrPrice INELASTIC.
6
Q
What are Inelastic Products? Give an example.
A
Essential things e.g. milk.
7
Q
What are Elastic things?Give an example.
A
Luxury things e.g. a holiday.
8
Q
For a PRICE ELASTIC product, a change in price will result in…
A
A greater proportional change in demand.
9
Q
For a PRICE INELASTIC product, a change in price will result in…
A
A smaller proportional change in demand.
10
Q
How do you make more revenue with a Price ELASTIC product? (Remember: Elastic products are luxury products)
A
You put the price down. As the luxury becomes cheaper, the demand for it rises - more people will buy it and more sales revenue will be made.
11
Q
How do you make more revenue on a PRICE INELASTIC product?(Remember: Inelastic products are essential products)
A
You put the price up. People still need this essential product so they will still buy it = more sales revenue as you are charging more.
12
Q
Deciding whether to raise/lower prices depends on…
A
The effect on Sales - the price elasticity.
13
Q
3 factors that a business needs to consider before raising/lowering prices:
A
1) The number of competitors.2) Is the product necesitarte or a luxury?3) How much people spend on the product out of their whole income.
14
Q
What are ‘Fixed Costs’?
A
The money spent on items that are needed no matter how many goods or services you sell.
15
Q
Do Fixed Costs change with output (the amount of things a business produces)?
A
No - they are FIXED.
16
Q
Give 2 examples of Fixed Costs:
A
1) Rent.2) Salaries.
17
Q
What are Variable Costs?
A
The money spent on items that are directly linked to the number of items made and sold.
18
Q
Do Variable Costs change with output?
A
Yes.
19
Q
Give 2 examples of Variable Costs:
A
1) Ingredients.2) Raw materials.
20
Q
What is the variable cost per unit?
A
It is the variable cost of making ONE product.
21
Q
Give the equation for ‘Total Variable Cost’:
A
Total Variable Cost =Quantity Produced x Variable Cost Per Unit.
22
Q
Give the equation for ‘Total Cost’:
A
Total Cost =Total Fixed Cost + Total Variable Costs.
23
Q
Give the formula for ‘Average Costs’:
A
Average Costs =Total Cost divided by Number Produced.
24
Q
Why is it important to a business to calculate average cost? (2)
A
1) It helps to decide what price to charge.2) To make a profit, the price of the product must be more than the average cost.
25
Why might a business set a price lower than the average cost? (2)
1) To Charge a low price to gain market share from competitors.2) To maintain production when demand is low.
26
Give the 2 formulas for Profit:
Profit =Total revenue - Total CostORProfit =Margin of safety x Contribution.
27
As a business produces more products, what happens to the average costs?
The average costs fall because the fixed cost is shared between more units and the business is using its fixed assets more efficiently.
28
Why is reducing average costs good for a business? (2)
1) The lower costs means higher profits.2) Lower Costs means the price can be lowered = more sales and the business will still make a profit.
29
How could a business reduce Average Costs? (4)
1) By spreading Fixed Costs = Increase Production.2) By reducing variable costs per unit = find cheaper raw materials.3) Increase the efficiency of labour = more jobs per hour.4) Achieve economies of large scale production.
30
What is Economies of Scale?
The advantages of producing large quantities of output. These advantages should reduce unit costs.
31
Give the formula for the percentage change in Economies of Scale:
Difference/Change————————— X100Original
32
Give 3 advantages of small scale production:
1) You can offer a personal service.2) Specialised products can be supplied.3) You can be flexible if the demand for products change.
33
Give an advantage of large scale production:
Your average unit cost of producing products will be lower which will lead to higher profits per product sold.
34
Types of Economies of ScaleWhat is ‘Technical Economies’?
A business saves on production costs by using better methods and equipment.
35
Types of Economies of ScaleWhat is ‘Managerial Economies’?
A business can employ specialist managers who improve efficiency.
36
Types of Economies of ScaleWhat is ‘Financial Economies’?
A business does not have to pay out as much money to raise finance.
37
Types of Economies of ScaleWhat is ‘Risk-Bearing Economies’?
A business had a range of products or services, so it is not dependent on one produce.
38
Types of Economies of ScaleWhat is ‘Purchasing Economies’?
A business Is given a discount for buying large quantities.
39
Types of Economies of ScaleWhat is ‘Marketing Economies’?
A business saved on advertising and transport costs.
40
What is DISECONOMIES of Scale?
A business could become too big and average costs start to rise.
41
How would Diseconomies of Scale happen? (3)
1) Communication and co-ordination becomes difficult.2) Management and Control problems = decisions take a long time.3) Workers may lack motivation.
42
Give the formula for Contribution:
Contribution =Price - Variable Cost per unit.
43
Margin of Safety =
Margin of Safety =Actual sales - breakeven level of sales.
44
Give the formula for Breakeven:
Breakeven =Fixed Costs—————————————(Selling price - Variable Cost per unit)
45
A business will breakeven when...
It sells enough products so that it’s total sales revenue is equal to its total costs (it is not making a profit or a loss.)
46
What happens if a business sells more than its breakeven level?
It will make a profit.
47
What happens if a business sells less than its breakeven level?
It will make a loss.
48
How is Breakeven Analysis useful? (3)
- It helps them set sales targets.
- helps to work out whether forecast sales will be enough to make a profit.
- make judgements about price and costs.
49
What is Margin of Safety?
How much sales can fall before breakeven point is reached.
50
Give the 4 main reasons why a business may need finance:
1) During Internal growth - buying new manufacturing equipment because of increased demand.2) Starting up a new business.3) Replacing old machinery and equipment.4) Research and development - e.g. pharmaceutical company seeking finance to fund development of a new drug.
51
What finance was offered by the council to new businesses opening or expanding in Bowton? (Case Study)
Grants.
52
What do we know about the finance that may have been available to GG Toys Plc over time?
They are a PLC, they have shareholders who can buy shares from the stock exchange - they get money from selling shares.
53
What have GG Toys Plc done in the past that may have required additional finance?
When they moved their factory to China - for the premises and for making some workers redundant.
54
Give 3 things GG Toys Plc need additional finance for:
1) They are developing an online presence - pay for the website&advertising.2) For the warehouse where they will keep all the stock before shipping to customers.3) Workers needed which will require training.4) May choose to install technology.
55
Define INTERNAL FINANCE:
The finance that comes from within the business - there is usually no cost to the business as they are using its own money.
56
What cost is involved with Internal Finance?
Opportunity cost - the business cannot use the money for another purpose anymore.
57
Define EXTERNAL FINANCE:
The finance that comes from outside the business - there is usually a cost for example interest or giving some of the ownership of the business to the provider.
58
What is offered in some cases with External Finance?
‘Security’. This means that in the event of the business being unable to pay back the finance, ownership of the asset transfers to the lender who may then sell it.
59
Why is sources of finance such an important issue for businesses?
Most sources of finance represent a long term commitment for the business. The business won’t be able to grow and develop if it ‘gets it wrong.’
60
Bank LoanExternal or Internal?Time period?
An amount of money borrowed from a bank, usually for a stated purpose. The loan is usually got a fixed period of time.External & Medium.
61
What could a bank loan be used for?
To help finance some form of business development for the purchase of new equipment. It may also be used to help a new business start up.
62
Give 2 advantages of Bank Loans:
1) Small manageable regularly payments can be made which is affordable for the business.2) Especially good as profits have been falling.
63
Give a disadvantage of Bank Loans:
1) If interest rates increase as Sundeep predicts, the repayments will be higher and the costs for the business will increase and the profits have already been falling.
64
OverdraftExternal or Internal?Time period?
An arrangement with the bank with the business will be able to withdraw more money from his bank account than it actually has.External and short.
65
What is an overdraft usually used for?
To help the business overcome a short term or temporary shortage of funds.
66
Give an advantage and disadvantage of an Overdraft:
1) Adv - it can be set up in advance and can be used to overcome cash shortages quickly.2) Disadv - Usually there are very high interest rates.
67
Trade CreditExternal or Internal?Time period?
When a business sells goods it sometimes allows the other business to take the goods away without paying for them immediately. External and short.
68
Give an advantage and disadvantage of using Trade Credit:
1) Adv - it will avoid cash flow shortages as he won’t have to pay till Toys have been sold.2) Disadv - Tom’s Toys may lose out on discounts.
69
Hire PurchaseExternal or Internal?Time period?
A system of obtaining items in return for a monthly payment over a given period of time. The business does not own the item.External and short.
70
What can Hire Purchase be used for?
Company cars, computer equipment etc.
71
Give 2 advantages of using Hire Purchase:
1) It will save money when they can pay monthly instead of lots upfront.2) Machinery will be replaced if something happens to them.
72
LeaseExternal or Internal?Time period?
The method of obtaining items for a stated period of time – this is like renting. External and medium.
73
What can Leasing be used for?
Company cars, photocopiers and buildings.
74
Give an advantage and disadvantage of Leasing:
1) Adv - the technology will be replaced very often so they won’t break down and the business will gain newer models.2) Disadv - They are paying more often and more money than if they just bought it upfront.
75
Owners InvestmentExternal or Internal?Time period?
The existing owners of the business may invest more money in it. Internal and Long.
76
What can Owners Investment be used for?
This source may be used to help pay for a major business development such as a takeover of another business or to pay off some long-term debts.
77
Give an advantage and disadvantage of Owners Investment:
1) Adv - there is no cost involved.2) Disadv - the ownership structure of the business may change.
78
Cash in Bank
External or Internal?
Time period?
The money owed by the business and built up over time following successful trading. Internal and short.
79
What can Cash in Bank be used for?
To help with the day-to-day operation of the business.
80
Give the only disadvantage of Cash in Bank:
There is an opportunity cost.
81
Taking a new partner
External or Internal?
Time period?
Partnerships can obtain additional finance by selling off part of the business to a new partner. External and long.
82
What can the finance from Taking a new Partner bring?
The finance may be used to buy new equipment or premises or to buy another business.
83
Give 2 disadvantages and 1 advantage of Taking a new Partner:
1) The Partner will have a say in the running of the business.
2) Will be entitled to a share of any profits.
1) Advantage - they may bring new skills to the business.
84
Share IssueExternal or Internal?Time period?
Source of finance used by limited companies to raise finance in return for a “share “in the business. External and Long.
85
What can Share Issue be used for?
Fund a major business development such as a takeover or a extension to a factory.
86
Give 2 disadvantages of Share Issue:
1) Dividends May have to be paid.2) Shareholders are entitled to have a say in the running of the company.
87
Retained Profit
External or Internal?
Time period?
Profit that is made by the business but kept back for its own use. Internal and medium or long.
88
What can Retained Profit be used for?
To help finance the purchase of many things such as equipment or premises.
89
Give an advantage and 2 disadvantages of Retained Profit:
1) Adv - it is interest free and no repayments have to be made.
2) Disadv - shareholders may be unhappy as they won’t be receiving dividends.
Disadv - opportunity cost.
90
Mortgage
External or Internal?
Time period?
A very long-term method of borrowing a large sum of money from a bank. External and Long.
91
What is a Mortgage used for?
To help fund the purchase of property.
92
Give an advantage and two disadvantages of Mortgage:
1) Adv - Small regular payments will be made which is affordable for the business.
2)Disadv - interest rates may increase so repayments will increase
Disadv - as they will have provided security for the borrowing, the warehouse could be taken by the bank if re-payments are made.
93
Grant
External or Internal?
Time period?
An amount of money usually made available for a specific purpose by the government.
External and Medium.
94
What can Grants be used for?
Factories, purchase of new equipment etc.
95
Give an advantage and disadvantage of Grants:
1) Adv - Free money for the business that doesn’t have to be paid back.
2) Disadv - the application procedure is a very time consuming process - the council will also restrict what you spend the money on.
96
Sale of assets External or Internal?Time period?
This is the selling of asset wheat the business may no longer need. Internal and Medium.
97
What can Sale of Assets be used for?
To help finance the purchase of equipment and/or buildings.
98
Give the only disadvantage of Sale of Assets:
The opportunity cost of not being able to use the asset again.
99
Limitations of Break Even: (4)
- forecast figures could be different in reality.
- number of competitiors may need to change prices.
- assumes fixed costs never change.
- only works for one product.
100
Cash Flow is...
The amount of money flowing into a business (income) and flowing out (expenditure) at only one time.
101
Lack of Cash Flow is...
The number one reason why businesses fail.
102
Give 2 examples of Cash Inflows:
- Sales Revenue.
| - Interest received.
103
Give 2 examples of Cash Outflows:
- Wages.
| - Costs e.g. raw materials.
104
Without cash flow, give 2 examples of things the business would be unable to do:
- Pay debts.
| - Buy supplies.
105
Without cash, a business would become...
Insolvent.
106
What is Cash Flow forecast?
A statement showing the expected flow of money into and out of a business over a period of time.
107
Cash Flow
| Balance brought forward =
Balance carried forward from previous month
108
Cash Flow
| Total Income =
Balance brought forward PLUS all income.
109
Cash Flow
| Total Expenditure =
All expenditure.
110
Cash Flow
| Balance carried forward =
Total Income - Total Expenditure.
111
What are the advantages of a Cash Flow Forecast? (3)
- To identify when a business is likely to have a short fall or surplus of cash.
- To avoid cash flow problems.
- To help plan for the future.
112
What are 2 disadvantages of Cash Flow Forecasts?
- The figures are only estimates.
| - Prices of goods sold and costs may change.
113
A Cash Flow statement is more likely to be accurate if...
It is based on past experience.
114
How could a business solve a CashFlow problem? (4)
- Speed up timings of inflows.
- Cut Costs (Expenditure)
- Arrange an overdraft.
- Use a debt factoring company to take owed money.
