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A level Business > Unit 5 > Flashcards

Unit 5 Flashcards

1
Q

What are the benefits of setting financial objectives?

A

+ Measures performance
+ Provide targets to aid with decision making
+ Motivate employees

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2
Q

Identify the difference between cash flow and profit

A

Cash flow: the difference between the inflows (money business receives) and outflows (pays)

Profit: difference between all sales revenue and costs

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3
Q

Identify potential causes of low cash flow levels

A
  • Holding large amounts of inventory/stock
  • Having sales on long credit periods
  • Using cash to purchase fixed assets
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4
Q

How is revenue calculated?

A

Revenue = quantity of goods sold x selling price per item.

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5
Q

What is meant by ‘gross profit’ and how is it calculated?

A

Difference between the money received from selling goods and the cost of providing goods.

Gross profit = revenue - cost of goods sold

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6
Q

What is meant by a gross profit margin and how is it calculated?

A

A gross profit margin is the percentage of sales revenue that is left once the cost of sales has been paid. It tells a business how much gross profit is made for every pound of sales revenue received. For example, a gross profit margin of 75% means that every pound of sales provides 75 pence of gross profit.

Gross profit margin = gross profit / sales revenue x 100

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7
Q

What is meant by operating profit and how is it calculated?

A

Operating profit is the difference between sales revenue, cost of goods sold and operating costs.

Sales revenue - all costs of production

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8
Q

What are some influences on a business’s financial objectives

A

Overall business objectives: finance objective must support business overall aim
Competitors
Different: Departments: all departments must work together to achieve same aim
Shareholders: consider their views in financial decision making

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9
Q

Who, primarily, needs to be satisfied by the objectives of the financial department?

A

Shareholders

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10
Q

What is meant by profit of the year and how is it calculated?

A

Final level of profit. The baseline figure for a business as all costs are taken away. Profit of the year is how much the business has at the end of the year that can then be utilised to back into the business.

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11
Q

Identify potential financial targets a business is likely to set

A

Revenue
Profit
Costs

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12
Q

What is cash flow?

A

The movement of money into and out of the business

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13
Q

Identify potential cash flow objectives

A
  • Reduce bank borrowing
  • Minimise the time taken by customers who pay on credit to settle outstanding invoices – this is traditionally a major concern of smaller businesses and an obvious focus for a cash flow objectives
  • Extend the period taken to pay suppliers to maximum permitted period
  • Minimising the amounts paid out in interest charges
    -Building a buffer balance of cash as a precaution against unforeseen circumstances (buffer balance - the amount your business has set aside for any unplanned expenses)
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14
Q

What is meant by the term ‘capital expenditure’?

A

Money spent on fixed assets (such as buildings) that represent long term investment into the business.

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15
Q

What is meant by return on investment and how is it calculated?

A

A measure of the returns (profit) made from the investment. Return on investment shows how good a business is in converting money invested into profit.

ROI = profit from investment / capital invested x 100

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16
Q

What is meant by the term ‘equity’?

A

Money raised by shares - a source of finance

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17
Q

What is meant by the term ‘asset’?

A

Anything a business owns that has value

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18
Q

What does capital structure refer to?

A

The way in which a business raises capital to purchase assets. This is done through debt capital (loans) and equity capital (selling shares)

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19
Q

Identify external influences on financial decisions

A
  • Competitors actions: alter decisions based of actions of competitors.
  • Market forces: keeping up with the changing market for example the transition to online shopping.
  • Economic factors: changes in economy.
  • Political factors: changes in government legislation for example minimum wage.
  • Technology: efficiency of technology monitoring financial data.
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20
Q

Identify internal influences on financial decisions

A
  • Corporate objectives
  • Resources available: financial targets may be limited by resources available.
  • Operational factors: is the business able to achieve the financial target.
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21
Q

Identify what is meant by the term ‘budget’

A

A budget is a financial plan

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22
Q

Explain the difference between income and expenditure budgets

A

Income budget is the forecasted earning from sales, whereas an expenditure budget is the expected spending of a business.

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23
Q

Explain why a business may set a budget?

A

They are essential in a business plan as a bank may be more willing to grant a loan as there is evidence of financial planning. Budgets aid in the decision of going ahead with a certain project/idea. A budgets could also aid in pricing decision.

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24
Q

Identify the different measures of profit

A
  1. Gross profit
  2. Operating profit
  3. Profit of the year
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25
Q

How are negative figures within a cash flow forecast represented?

A

(brackets)
For example (100) = -100

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26
Q

A cash flow forecast is a ___ about what might happen in the future.

A

A cash flow forecast is a prediction about what might happen in the future.

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27
Q

What does a cash flow forecast represent?

A

A cash flow forecast represents an estimation of future sales and expenses. It portrays the difference between the cash entering and leaving the business and provides an overall bank balance of the business.

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28
Q

Identify the terminology used when referring to the estimated cash inflows and outflows of a cash flow forecast.

A

Cash inflows are ‘Receipts’
Cash outflows are ‘Payments’

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29
Q

How is net cash flow calculated?

A

Total outflows - total Inflows

30
Q

Explain the term “income budget”

A

Income budgets are forecasted earning from sales

31
Q

Explain the term “expenditure budget”

A

Expenditure budget is the expected spending of a business.

32
Q

Explain the term “profit or loss budget”

A

Profit and loss budgets are calculated by subtracting forecast expenditure (costs) from forecasted sales income.

33
Q

Explain and describe the process of setting a budget

A
  1. Through market research and trading records, an income budget should be prepared.
  2. Using income budget as a guide and suppliers’ costs, an expenditure budget can be constructed.
  3. Forecast profit (or loss) by comparison of income and expenditure.
34
Q

Identify potential difficulties of setting budgets

A
  • There may be no historical evidence available to the business e.g. a new business would have no data on sales income.
  • Forecasting costs are high, a business may lack experience estimating costs.
  • Competitors may respond to the actions of a business cutting prices which could effect sales income.
35
Q

Explain what variance analysis portrays

A

Variance analysis is the difference between planned activities in the form of budgets and the actual results that were achieved. A favourable or adverse variance could be identified.

36
Q

Explain what is meant by favourable and adverse variance

A

Favourable variance occurs when costs are lower than what was forecasted. Adverse variance occurs when costs are higher than expected.

37
Q

Explain how a business may respond to favourable variance

A

+ Increase production, giving increased profit margins
+ Reduce costs to increase sales
+ Reinvest back into the business e.g. increase dividends if profits are exceeded

38
Q

Explain how a business may respond to adverse variance

A
  • Reduce costs
  • Increase advertising in aim to increase sales
  • Reduce prices to increase sales
39
Q

Identify the benefits of budgets

A

+ Targets can be set for each section of the business = motivation
+ Inefficient waste can be identified
+ Budgets can guide managers to focus decision making on the achievement of objectives
+ Budgeting should improve financial control by preventing overspending
+ Budgets can improve internal communication

40
Q

Identify a potential drawback of constructing a budget

A
  • A budget may become inflexible
  • An estimate - prediction
41
Q

Identify and explain the structure of a cash flow forecast

A
  1. Receipts - inflows
  2. Payments - outflows
  3. Running balance - opening and closing balance (balance at the beginning and end of each month)
42
Q

Explain what a break even graph illustrates about a business and identify the formula to support your answer

A

A break even graph illustrates when a business’s revenue is equal to the total costs of production.

Break even = Fixed costs / contribution per unit
(contribution is the difference between sales and variable costs of production)

43
Q

Explain and identify what aspects are required to construct a break even chart

A
  • Fixed cost (horizontal line - remain constant)
  • Total costs (starts with the FC line)
  • Variable cost (every time something is produced - if nothing’s produced we dont play so this line starts at 0)
  • Sales revenue (how much revenue the business is achieving - starts at 0)
44
Q

Label the axes of a break even graph

A

y = costs/revenue
x = output (units)

45
Q

Explain how an individual can identify the break even point

A

Break even point is where the ‘sales revenue’ and ‘total cost’ line cross

46
Q

Explain what is meant by a margin of safety in terms of a break even graph

A

How many units are sold above the break even point

47
Q

Explain how can an individual can identify if they are making profit or a loss on a break even graph

A

Profit: to the right of the break even line
Loss: to the left of the break even line

48
Q

Explain the term ‘contribution’ and identify how its calculated

A

Contribution is the difference between sales revenue and variable cost

Contribution = sales revenue - variable cost

49
Q

Contribution can be used to calculate two thing, identify these and give their formulas to support your answer

A
  • Break even point = fixed costs / contribution per unit
  • Level of profit = contribution - fixed costs
50
Q

Identify the benefits of a break even graph

A
  • Starting a new business
  • Supports loan applications
  • Measuring profit and losses
51
Q

Identify the drawbacks of a break even graph

A
  • Sales revenue assumes that all output produced is sold at a uniform price
  • Total cost does not take in discount from EoS
52
Q

Identify the formulas analysing the performance of a business in terms of profit:

  • Gross profit margin
  • Operating profit margin
A

Gross profit margin = gross profit / sales revenue x 100

Operating profit margin = operating profit / sales revenue x 100

53
Q

Money leaving a business is known as ___, and money coming into the business is known as ___

A

Money leaving a business is known as payables, and money coming into the business is known as receivables.

54
Q

What does the relationship between payables and receivables enable a business to do

A
  • Forecast periods where outflows might exceed inflows
  • Plan when and how to pay major expenditures
  • identify when there is a cash surplus that could be used else where
  • Supports applying for a loan
55
Q

Identify potential sources of finance

A
  • Debt factoring
  • Over draft
  • Retained profit
  • Share capital
  • Bank loans
  • Venture capital
  • Trde credit
  • Sales of assets
56
Q

Explain how debt factoring works

A

A business sells their debt to a debt factoring company. The debt factoring company buys debt for less than its full value. This given the business a quick source of short term finance

57
Q

Identify short term external sources of finance

A
  • Over draft
  • Bank loan
  • Debt factoring
  • Trade credit
58
Q

Identify long term external sources of finance

A
  • Loan
  • Share capital
59
Q

Identify the characteristics of an overdraft

A

An overdraft allows a business to spend beyond what is in their bank account, up to an agreed limit. Allows a business to continue purchasing even when they dont have their own capital. Short term source of finance. Short term external source of finance.

60
Q

Identify a drawback of an overdraft

A

A business has to pay for an overdraft and the interest for these fees are expensive. Interest payments are higher than for a bank loan.

61
Q

Explain the characteristics of using retained profit as a source of finance.

A

At the end of the financial year if a business has retained profit they can distribute it to their shareholder or retain the capital to used for growth or development. Internal source of finance. However, shareholders may demand that the retained profit is used as dividend

62
Q

Identify an internal source of finance

A
  • Retained profit
  • Sales of assets
63
Q

Explain the characteristics of share capital in terms of sources of finance

A

Share capital is brining new owners into the business in return for a share of the business’s ownership. This generates large amounts of money and could bring knowledge/experience. However, this means diluting the control of the business.

64
Q

Identify an advantage and disadvantage of a bank loan

A

+ A business can raise high amounts of finance
- Payed back with the addition of interest

65
Q

Identify the characteristics of venture capital as a source of finance

A

Venture capital means involving other wealthy individuals to invest into your business. These venture capitalists may want a share in return for their investment. They may bring knowledge and expertise. A business may be required to pay a high dividends to these venture capitalists (a business may have been turned down a loan from the bank as their business is too risky, so venture capitalists require a high dividends as they are investing into a risky business.

66
Q

Explain the characteristics of trade credit

A

Short term source of finance. A business receives materials but pays for them at a later date. Trade credit periods can vary from a week to a month. Short term external source of finance.

67
Q

Identify the characteristics of selling assets

A

Internal source of finance. When a business sells assets it no longer requires such as machinery, warehouse or land. However, these assets may be required in the future.

68
Q

Identify and explain potential reasons for poor cash flow

A
  • Poor management (failure to chase up outstanding payment or failure to identify negative cash flow)
  • Too much trade credit (this interest free loan slows down inflows)
  • Unexpected expenditure
69
Q

Identify methods of improving cash flow

A
  • Debt factoring
  • Improve cash flow forecasting
  • Managing stock (the business may have an inappropriate amount of capital in stocks)
  • Managing credit control (how much is owed by customers)
  • Delay payment to suppliers
70
Q

Identify methods of improving profit

A
  • Cut costs
  • Increase prices
  • Increase capacity utilisation
  • Increase efficiency
71
Q

Identify the difficulties of improving profit

A
  • Increasing prices may reduce sales
  • Cutting cost may interfere with quality (product or output)
  • Capacity utilisation may cause too much pressure
  • Increasing efficiency may cause redundancies

A level Business (10 decks)

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