3.5 Decision making to improve financial performance

Question 1

Break-even charts

Answer 1

A chart that shows the sales volume level at which total costs equal sales. Losses will be incurred below this point, and profits will be earned above this point.

Question 2

Break-even output

Answer 2

Fixed costs/contribution per unit

Question 3

Budgets

Answer 3

A detailed plan of income and expenses expected over a certain period of time

Question 4

Capital expenditure

Answer 4

Expenditure on assets which are intended to be kept in the business (e.g. IT systems, machinery) rather than sold or turned into products

Question 5

Capital structure

Answer 5

Capital structure is the allocation of debt and equity that a firm uses to fund its operations and expansions.

Question 6

Cash flow

Answer 6

The flow of cash into and out of the business

Question 7

Cash flow forecasts

Answer 7

Estimating future monthly cash inflows and outflows, to find out the net cash flow

Question 8

Contribution per unit

Answer 8

Selling price – variable costs per unit

Question 9

Costs

Answer 9

Amounts incurred by a business as a result of its trading operations

Question 10

Debt

Answer 10

A sum of money that is owed or due

Question 11

Debt factoring

Answer 11

A business sells its outstanding customer accounts (those who have not paid their debts to the business) to a debt factoring company.

Question 12

Financial objectives

Answer 12

Outline what the business wishes to achieve in monetary terms, during a certain period of time.

Question 13

Gross profit

Answer 13

The difference between selling price and the direct costs generated by the goods.

Question 14

Loans

Answer 14

A thing that is borrowed, especially a sum of money that is expected to be paid back with interest.

Question 15

Margin of safety

Answer 15

Sales of volume – break even output

Question 16

Operating profit

Answer 16

The profit earned by a business from its entire trading operations – stated before financing (e.g. Interest) and tax

Question 17

Overdrafts

Answer 17

Short term borrowing the bank. The business only borrows as much as it needs to cover its daily cash shortfall

Question 18

Payables

Answer 18

Debts owed by a business; liabilities.

Question 19

Profit

Answer 19

The difference between total sales and total costs

Question 20

Receivables

Answer 20

Amounts owed to a business, regarded as assets.

Question 21

Retained profits

Answer 21

Earnings earned by a business that are kept in the business rather than distributed as dividends

Question 22

Share capital

Answer 22

Business finance that has no guarantee of repayment or of annual income but gains a share of the control of the business and its potential profits

Question 23

Sources of finance

Answer 23

Where the money comes from

Question 24

Total contribution

Answer 24

Contribution per unit x unit sales

Question 25

Variance analysis

Answer 25

Variance between actual and budgeted or targeted levels of performance and identification of their causes

Question 26

Venture capital

Answer 26

High risk capital invested in a combination of loans and shares, usually in a small, dynamic business