Decision Making To Improve Financial Performance

Question 1

Gross profit margin

Answer 1

Businesses revenue-direct costs/costs of sales

Question 2

Operating profit margin

Answer 2

Revenue -direct+indirect costs

Question 3

Profit for year

Answer 3

Measure of businesses profit that takes into account wider range of costs and incomes eg taxation

Question 4

Profits

Answer 4

The extent to which revenues from selling a product exceed the costs of producing it

Question 5

Cash flow

Answer 5

Movement of cash into and out of a business over time

Question 6

Direct costs

Answer 6

Can be clearly allocated to a particular product/ area of business eg raw materials

Question 7

Indirect costs

Answer 7

Relate to all aspects of a businesses activities eg maintenance costs for buildings

Question 8

What is a profit margin

Answer 8

Compares a business’s profit to its sales revenue and expresses outcome as a percentage

Question 9

Financial objectives

Answer 9

Revenue, cost and profit objectives
Investment levels and returns
Capital structure objectives

Question 10

Capital structure

Answer 10

Refers to the way in which a business has raised the capital it requires to purchase it’s assests

Question 11

Internal influences on financial objectives

Answer 11

Objectives of senior management
Nature of product sold
Overall strategy and business objectives

Question 12

External influences on financial objectives

Answer 12

Legal environment 
Political environment 
Technological environment
Economic environment
Competitive environment

Question 13

Types of budgets

Answer 13

Revenue/earning - expected revenue
Expenditure (cost)
Profit - revenue - expenditure

Question 14

Construction of budgets

Answer 14

• Analysing the market - predict trends
• Researching costs for labour fuel, raw material , negotiate prove reductions?
• considering government estimates for wage rises

Question 15

Difficulties in constructing budgets

Answer 15

• difficult to forecast sales accurately
• risk of unexpected changes
• decisions of government ( changes in tax?)

Question 16

Variance analysis

Answer 16

Process of investigating any differences between forecast data and actual figures

Adverse - negative/ loss
Favourable - profit/ less than expected for costs

Question 17

Advantages of budgeting

Answer 17

• Allow managers to make informed, focused decisions
• Prevent overspending
• Senior managers can direct extra funds into important areas of the business
• Motivate staff - performance increase

Question 18

Disadvantages of budgeting

Answer 18

• Delegation of budgets requires training

- teething problems as employees adjust

Question 19

Reasons for cash flow forecasts

Answer 19

• to support applications for loans

- to help avoid unexpected cash flow crises

Question 20

Payables

Answer 20

Time take by a business to pay its suppliers

Question 21

Receivables

Answer 21

Time taken by a businesses customers to pay a business for its products

Question 22

Break even output

Answer 22

Where total revenue = total costs

Neither profit or loss made

Question 23

Contribution

Answer 23

Difference between revenue and variable costs

Question 24

Margin of safety

Answer 24

Amount by which a businesses current level of output exceeds break even output

Question 25

Advantages of break even

Answer 25

• Forecast the effect of varying numbers of customers on costs,revenues, profits
• simple technique not expensive training
• quick to complete
• can support bank loan applications

Question 26

Disadvantages of break even

Answer 26

• says nothing about level of sales a business might achieve - less
• simplification of real world all products not one price
• difficult to use if sell a range of products
• only as accurate as data on which it’s based

Question 27

Internal sources of finance

Answer 27

Retained profits

Sales of assests

Question 28

External sources of finance

Answer 28

Overdrafts 
Debt factoring 
Bank loans, mortgages
Venture capital
Share capital

Question 29

Non current assests

Answer 29

Items that a business owns and its expects to retain for 1 year or longer
Eg property, vehicles

Question 30

Share capital

Answer 30

Finance invested into a company as a result of the sale of shares in the business

Question 31

Crowdfunding

Answer 31

Practice of funding a project or venture by raising many small amounts of money from a large number of people typically via Internet

Question 32

Contribution per unit

Answer 32

Selling price per unit-variable costs per unit

Question 33

Break even level of output

Answer 33

Fixed costs /contribution per unit