6 Decision making to improve financial performance

Question 1

What are the three benefits of setting financial objectives? (6.1 setting financial objectives)

Answer 1

As a measure of performance
As targets that cen be a focus for decision making
That potential investors or creditors may be able to asses that viability of the business

Question 2

What is capitol expenditure?(6.1 setting financial objectives)

Answer 2

Money used to purchase, upgrade or improve the life of long-term assests.

Question 3

Objectives for investment (capitol expenditure levels: capitol expenditure objectives may depend on (3 things and a possible objective)? (6.1 setting financial objectives)

Answer 3

The overall corporate objectives
The type of business
The state of the economy and the market the company operates in
Possible objective: return on an investment eg 10% this percentage is calculated using the formula:
return from investment (or profit)
—————————————————— x100
capitol invested
This calculation might also be used when deciding between two different investments.

Question 4

What is equity?(6.1 setting financial objectives)

Answer 4

The money that a business raises through the issue of shares.

Question 5

What is borrowing? (6.1 setting financial objectives)

Answer 5

The money that a business raises through loan capital.

Question 6

What does capitol structure refer to? (6.1 setting financial objectives)

Answer 6

The long-term capital (finance) of a business, made up of equity and borrowing.

Question 7

Why is the proportion of borrowing to equity important (3 reasons)? (6.1 setting financial objectives)

Answer 7

The higher the borrowing, the greater the interest repayment
High interest payments could put a business at risxk if profit should fall
Any rise in interest rates could have a big impact on profit

Question 8

Targets may be set in terms of what and how is this measured (give the formula)? (6.1 setting financial objectives)

Answer 8

The proportion of long-term capitol that is debt.
Measured by the gearing ratio, which is calculated using this formula:
loan capitol
——————— x100
total capitol
where total capitol= loan capitol + equity

Question 9

Objectives for revenue might depend on what (2 things)? (6.1 setting financial objectives)

Answer 9

The type of market a business is operating in
The state of the economy

Question 10

Objectives for revenue need to be coordinated with other functional areas such as the competitive environment necessities cost and profit objectives: what are the three cost objectives?(6.1 setting financial objectives)

Answer 10

Unit costs targets
Specific targets for individual costs
Overall cost minimisation

Question 11

Objectives for revenue need to be coordinated with other functional areas such as the competitive environment necessities cost and profit objectives: what are the three profit objectives?(6.1 setting financial objectives)

Answer 11

A particular figure
A percentage increase
In terms of profit margin

Question 12

What is gross profit? (6.1 setting financial objectives)

Answer 12

The difference between a business’s sales revenue and the direct costs of production

Question 13

What is operating profit?

Answer 13

The difference between the gross profit and the indirect costs of production

Question 14

How is gross profit calculated?(6.1 setting financial objectives)

Answer 14

gross profit= sales revenue - direct costs of production

Question 15

How is operating profit calculated? (6.1 setting financial objectives)

Answer 15

operating profit = sales revenue - all costs of production
or
operating profit = gross profit - expenses

Question 16

What is profit for the year? (6.1 setting financial objectives)

Answer 16

Includes other expenditure, such as:
interest payments
tax to be paid
other income such as:
interest recieved
money recieved from the sale of assests

Question 17

How do you calculate profit for the year? (6.1 setting financial objectives)

Answer 17

Profit for the year = operating profit + other income - other expenditure

Question 18

What are profit margins?

Answer 18

An accounting measure designed to gauge the financial health of a business.
It expresses the profit figure as a % of turnover.

Question 19

Profit figures are most easily analysed by converting them to ratios or profit margins: how do you work that out? (6.1 setting financial objectives)

Answer 19

Gross profit margin = gross profit Profit for the year margin = profit for the year
—————— x 100 ————————– x100
sales revenue sales revenue

Operating profit margin = operating profit
———————— x100
sales revenue

Question 20

Once profit margins are calculated performance can then be assed by what two things? (6.1 setting financial objectives)

Answer 20

Comparing figures to those of previous years
Comparing figures to those of similar businesses

Question 21

What is cash flow? (6.1 setting financial objectives)

Answer 21

The money moving into and out of a business over a given period of time

Question 22

Cash flow objectives may vary according to circumstances and include what 5 things? (6.1 setting financial objectives)

Answer 22

Targets for monthly closing balances
Reduction of bank borrowings to a target level
Reduction of seasonality in sales
Targets for achieving payment from customers
Extention of the business’s credit period to pay suppliers

Question 23

Cash flow is the difference between what? (6.1 setting financial objectives)

Answer 23

The actual amount of money a business recieves (inflows) and the actual amount it pays out (outflows)

Question 24

Profit is the difference between what? (6.1 setting financial objectives)

Answer 24

All sales revenue (even if payment has not yet been recieved) and expenditure.

Question 25

A profitable business may have cash flow problems due to what 3 reasons? (6.1 setting financial objectives)

Answer 25

Holding large amounts of inventory (stock) Having sales on long credit periods The purchase of fixed assets using cash flow

Question 26

What are the 5 external influences on financial objectives and decisions? (6.1 setting financial objectives)

Answer 26

Competitor actions Market forces Economic factors Political factors Technology

Question 27

What are the 3 internal influences on financial objectives and decisions? (6.1 setting financial objectives)

Answer 27

Corporate objectives Resources available Operational factors

Question 28

What is a budget?

Answer 28

a financial plan

Question 29

What two things does a budget provide? (6.2 Analysing financial performance)

Answer 29

A target for entrepreneurs and managers A basis for a later assessment of the performance of a business

Question 30

What is the process of constructing a budget? (6.2 Analysing financial performance)

Answer 30

Market research Use income budgets as a guide ^ >>>>>>>> step 1 = prepare step 2 = construct step 3 = forecast profit income expenditure (or loss) by comparison budgets budgets of income and expenditure ^ ^ trading records Potential suppliers may (established busines) offer information on costs

Question 31

Businesses set budgets because of what 3 reasons? (6.2 Analysing financial performance)

Answer 31

They are an essential element of a b usiness plan Budgets can help businesses decide wheather or not to go ahead with a business idea Budgets can help with pricing decisions

Question 32

The difficulties of setting budgets include what 3 things? (6.2 Analysing financial performance)

Answer 32

Lack of data upon which to base a budget Forecasting costs can be problematic Competitors actions may negate data used for budgeting

Question 33

What are the 6 benefits of using budgets? (6.2 Analysing financial performance)

Answer 33

Targets can be set for each part of a business Inefficiency and waste can be identified May focus decision making on the achievement of objectives Should improve financial control by preventing overspending May help improve internal communication May be motivating for user while enabling managers to monitor and control

Question 34

What are the 2 drawbacks of using budgets? (6.2 Analysing financial performance)

Answer 34

Operation can become inflexable Dependent on accuracy of data

Question 35

What is variance analysis? (6.2 Analysing financial performance)

Answer 35

The study by managers of the differences between planned activities in the form of budgets and the actual results achieved

Question 36

Varience analysis allows managers to do what? (6.2 Analysing financial performance)

Answer 36

Examine the differences between planned activities in the form of budgets and the actual results achieved.

Question 37

Variance analysis allows managers to examine the differences between planned activities in the form of budgets and thr actual results achieved. The result may be what (two things)? (6.2 Analysing financial performance)

Answer 37

A positive (or favourable) variance when costs are lower than forecast or profit or revenue higher. A nagative (or adverse) variance when costs are higher than expected or revenues are less than anticipated.

Question 38

Variances can be used to inform decision making. What are 3 things positive variances might lead to? (6.2 Analysing financial performance)

Answer 38

Increased production if prices are rising. Reduced prices if costs are below expectations and that aim is sales growth. Reinvestment in the business or higher divided payments.

Question 39

Cash flow forcasts comprise what three sections? (6.2 Analysing financial performance)

Answer 39

Receipts Payments Running balance

Question 40

What are payables? (6.2 Analysing financial performance)

Answer 40

Money owed for goods and services that have been purchased on credit (sometimes called trade creditors)

Question 41

What are receivables? (6.2 Analysing financial performance)

Answer 41

Money owed by a business's customers for goods or services purchased on credit (soemtimes called trade debtors).

Question 42

The analysis of the relationship between payables (money leaving) and the recievables (money coming in) is important as it will enable a business to do what 5 things? (6.2 Analysing financial performance)

Answer 42

Forecast when cash outflows might exceed cash inflows. Plan when and how to finance major items of expenditure. Highlights any periods when cash surpluses may exist. Asseses wheather an idea will generate enough cash to be able to survive. Use the analysis as evidence when when requesting a loan.

Question 43

A break-even chart is a graph used in what... to do what? (6.2 Analysing financial performance)

Answer 43

Used in break-even analysis to illustrate the point at which total costs are equalto total revenue

Question 44

How is a breakeven chart constructed (10 steps)? (6.2 Analysing financial performances)

Answer 44

Give the chat a title Label the axes (horizontal -output in units vertical -costs/revenues in pounds) Draw on the fixed cost line Draw on the variable cost line Draw on the total cost line Draw on the sales revenue line Label the break-even point where sales revenue = total cost Mark on forecast level of the company's output Mark on the margin of safety Mark clearly the amount of profit and loss

Question 45

What is contribution? (6.2 Analysing financial performance)

Answer 45

The amount of money left over after variable costs have been subtracted from revenue.

Question 46

How to work out contribution? (6.2 Analysing financial performance)

Answer 46

Sales revenue - variable costs or Unit contribution x output

Question 47

How to work out unit contribution? (6.2 Analysing financial performance)

Answer 47

sales price per unit - variable cost per unit

Question 48

How to work out break-even? (6.2 Analysing financial performance)

Answer 48

fixed costs ----------------------------- contribution per unit

Question 49

How to work out profit? (6.2 Analysing financial performance)

Answer 49

contribution total - fixed costs

Question 50

Effects of changes in key variables on the break even chart are? (6.2 Analysing financial performance)

Answer 50

Change in key variable - Impact on break-even chart- Effect on break-even output- Increase in selling price Revenue line pivots upwards Lower break-even output Fall in selling price Revenue line pivots downwards higher break-even output Ride in fixed costs Parallel upward shift in fixed and total cost lines Higher level of output required to break even Fall in fixed costs Parallel downward shift in fixed and total cost lines Lower level of output required to break even Rise in variable costs Total cost line pivotes upwards Higher level of output needed tp break even Fall in variable costs Total cost line pivots downwards Lower level of output needed to break even

Question 51

What are the 5 benefits of break-even analysis? (6.2 Analysing financial performance)

Answer 51

Quick and easy to perform Useful for new business start-ups To support loan applications To measure profits and losses To model 'what if?' scenarios

Question 52

What are the 4 drawbacks of break-even analysis? (6.2 Analysing financial performance)

Answer 52

No costs are truly fixed The analysis is only as good as the information provided Sales revenue assumes all output is sold and at a uniform price The total cost ignored any bulk-buying discounts

Question 53

What is the use of data for financial decision making and planning? (6.2 Analysing financial performance)

Answer 53

Data available: Poviding opportunity for: budgets A scientific approach cashflow to reducing risk in decision break-even making. ratio analysis

Question 54

What are 5 external (long-term) sources of finance? (6.3 Making financial decisions: sources of finance)

Answer 54

Equity Loans Venture capital Mortgages Crowdfunding

Question 55

What are the 2 internal (long term) sources of finance? (6.3 Making financial decisions: sources of finance)

Answer 55

Retained profit Sale of assets

Question 56

what are the three external (short-term) sources of finance? (6.3 Making financial decisions: sources of finance)

Answer 56

overdraft debt factoring trade credit

Question 57

What are the advantages and disadvantages of retained profit? (6.3 Making financial decisions: sources of finance)

Answer 57

Advantages: No interest to pay Does not have to be paid back No dilution os shares Disadvantages: shareholders may have reduced dividends

Question 58

What are the advantages and disadvantages of sale of assets? (6.3 Making financial decisions: sources of finance)

Answer 58

Advantages: no interest to pay does not have to be paid back no dilution of shares Disadvantages: once sold, gone forever

Question 59

What are the advantages and disadvantages of equity? (6.3 Making financial decisions: sources of finance)

Answer 59

Advantages: no interest to pay does not have to be paid back Disadvantages: dilution might upset existing shareholders

Question 60

What are the advantages and disadvantages of loans? (6.3 Making financial decisions: sources of finance)

Answer 60

Advantages: no dilution of shares Disadvantages: interest payments set maturity dates

Question 61

What are the advantages and disadvantages of overdraft? (6.3 Making financial decisions: sources of finance)

Answer 61

Advantages: quick and easy to set up and very flexable interest payed only on amount overdrawn Disadvantages: interestpayments higher than for a loan

Question 62

What are the advantages and disadvantages of debt factoring? (6.3 Making financial decisions: sources of finance)

Answer 62

Advantages: immediate cash improves cash flow protection from bad debts reduced administration costs Disadvantages: expensive customer relations may be effected

Question 63

What are the advantages and disadvantages of trade credit? (6.3 Making financial decisions: sources of finance)

Answer 63

Advantages: eases cash flow buy now, pay later Disadvantages if late paying can damage credit history

Question 64

What are four causes of poor cash flow problems? (6.4 making financial decisions: improving cash flow and profits)

Answer 64

Poor management Giving too muvh trade credit Overtrading Unexpected expenditure

Question 65

What are the three methods of improving cash flow? (6.4 making financial decisions: improving cash flow and profits)

Answer 65

Debt factoring Sale and leaseback Improved working capital control

Question 66

What is working capital? (6.4 making financial decisions: improving cash flow and profits)

Answer 66

A measure of an organisation's short-erm financial health, the cash available to a business for its day-to-day operations, calculated by current assets minus current liabilities.

Question 67

What is profitability? (6.4 making financial decisions: improving cash flow and profits)

Answer 67

Measures profits against some yardstick, such as the sales revenue achieved by the business

Question 68

How can control of working capitol can help cash flow management? (6.4 making financial decisions: improving cash flow and profits)

Answer 68

Selling stocks of finished goods quickly Making customers pay on time and offering less trade credit Slowing cash outflows Stimulating sales Selling off excess material stocks

Question 69

How can profitability be improved? (6.4 making financial decisions: improving cash flow and profits)

Answer 69

Increase prices Cut costs use capacity as fully as possible Increase efficiency

Question 70

What are 3 difficulties improving cash flow? (6.4 making financial decisions: improving cash flow and profits)

Answer 70

Factoring: profit margin reduced and it may highlight cash flow difficulties Sale and leaseback: asset is removed forever and rent must now be paid Working capital control: customers put off by reduced credit periods and suppliers unwilling to extend credit periods

Question 71

What are 4 difficulties improving profit? (6.4 making financial decisions: improving cash flow and profits)

Answer 71

Increasing prices: reduced sales and revenue Cutting costs: possible reduction in quality Full capacity usage: problems in matching supply with demand Increasing efficiency: possible redundancies if technology is introduced