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A-Level Business > unit 5 > Flashcards

unit 5 Flashcards

1
Q

whats revenue

A

is the money received from sales of goods or services

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2
Q

whats the calculation for total revenue

A

selling price x numbers of items sold

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3
Q

what are fixed costs (FC)

A

cost that do not change directly with the level of output.

they will increase as a firm grows, for example rents a larger store, but will not go up by a set amount for each new unit made.

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4
Q

what are variable costs (VC)

A

costs that change directly with output. they will increase by a set amount each time a new unit is made.

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5
Q

whats the formula for totals costs

A

total fixed costs + total variable costs

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6
Q

why is profit important

A

to be reinvested
to keep owners/shareholders happy
to help attract new shareholders to invest
to help obtain investments and bank loans
to pay taxes

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7
Q

What tax do business have to pay

A

corporation tax

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8
Q

how much is corporation tax

A

20%

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9
Q

what are overheads

A

the costs of a business that do not directly contribute to the cost of making the product of performing the service.

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10
Q

whats cashflow

A

the movement of cash into and out of a business

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11
Q

whats the main reason businesses fail

A

cash flow

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12
Q

examples of cash inflows

A

cash sales
receipts from trade debtors
sale of fixed assets
interest on bank balances
grants
loans from bank
share capital invested

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13
Q

examples of cash outflow

A

payments to suppliers
wages and salaries
payments for fixed assets
tax on profits
interest on loans and overdrafts
dividends paid to shareholders
repayment of loans

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14
Q

what is meant by ‘cash flow problem’

A

when a business does not have enough cash to be able to pay its liabilities

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15
Q

main causes of cash flow problems

A
  • low profits or (worse) losses
  • too much production capacity
  • excess inventories held
  • allowing customers too much credit and too long to pay
  • overtrading, growing business to fast
  • unexpected change in the business
  • seasonal demand
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16
Q

what are ‘trade debtors’

A

they owe you money

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17
Q

problems with allowing customers too much credit

A

late payment is a common problem the payment may go ‘bad’

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18
Q

problems with too much stock

A

if its food it can go out of date
the excess stock could of been spent on investments.

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19
Q

what is overtrading

A

when a business expands too quickly without having the financial resources to support such a quick expansion

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20
Q

what is debt factoring

A

is when a business sells its accounts receivables to a third party at a discount, enabling companies to immediately unlock cash tied up in unpaid invoices without having to wait the usual payment terms. Debt factoring is basically another term used for invoice factoring.

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21
Q

what is selling lease back

A

a sale and leaseback is where a company sells commercial property which they own and occupy to a third party who then agrees to simultaneously lease the Property back to the company on completion of the transfer so that they can remain in the property.

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22
Q

whats a contingency fund

A

a reserve of money set aside to cover possible unforeseen future expenses

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23
Q

why produce a cash flow forecast

A
  • advanced warning of cash shortages
  • make sure that the businesses can
    afford to pay suppliers and employees
  • spot problems with customer payments
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24
Q

common problems with cash flow forecast

A

sales prove lower than expected
customers do not pay up on time
costs prove higher than expected
imprudent cost assumptions

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25
Q

whats working capital

A

money available to a company for day to day operations

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26
Q

how how to manage amounts owned by customers

A

credit control
selling of debts to debt factors
cash discounts for prompt payment
improved record keeping

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27
Q

ways to improve cash position (short term)

A

short term
- reduce current assets (stock and debtors)
- increase current liabilities (delaying payments)
- sell surplus fixed assets

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28
Q

ways to improve cash position (long term)

A

long term
- increase equity finance
- increase long term liabilities
- reduce net outflow on fixed assets

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29
Q

what is breakeven

A

the point at which total cost and total revenue are equal

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30
Q

what are fixed costs

A

costs that don’t change directly with output

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31
Q

what are variable costs

A

costs that change directly with output

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32
Q

total costs formula

A

fixed costs + variable costs

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33
Q

whats total contribution

A

the difference between the total sales revenue and the total variable costs

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34
Q

formula for contribution per unit

A

selling price - variable costs per unit

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35
Q

breakeven outputs forumla

A

contribution per unit (£)

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36
Q

contribution formula

A

total sales less total variable costs

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37
Q

what are the three ways of calculating break even

A
  • a table
  • a formula
  • a graph
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38
Q

contribution per unit formula

A

selling price - variable cost per unit

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39
Q

what 4 things go on the break even chart

A

total revenue
total costs
fixed costs
break even

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40
Q

whats margin of safety (MOS) formula

A

actual output - break even output

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41
Q

what is margin of safety (MOS)

A

The different between the output and break even output on the break even chart

42
Q

how to change break even point

A
  • increase/decrease the price
  • increase/decrease fixed costs
  • increase/decrease variable costs
43
Q

strengths of breakeven analysis

A
  • focuses on what output is required before a business reaches profitability
  • helps management and finance providers better understand the viability and risk of a business or business idea
  • margin of safety calculation shows how much a sales forecast can prove over optimistic before losses are incurred
  • illustrates the importance of keeping fixed costs down to a minimum
  • calculations are quick and easy
44
Q

limitations of break even analysis

A
  • unrealistic assumptions, products are not sold at the same price at different levels of output; fixed costs do vary when output changes
  • sales are unlikely to be the same as the output - there may be some build up of stocks or wasted output to
  • variable costs do not always stay the same. for example as output rises the business may benefit from being able to buy inputs at a lower price
  • most businesses sell more than one product
  • a planning aid rather than a decision making tool
45
Q

break even analysis key assumptions

A
  • selling price per unit stays the same, regardless of amount produced
  • variable costs vary in direct proportion to output
  • all output is sold
  • fixed costs do not vary with output, they stay the same
46
Q

what is financial objective

A

a specific goal or target of relating to the financial performance, resources and structure of a business

47
Q

key benefits of using financial objectives

A
  • a focus for the entire business
  • important measure of success or failure for the business
  • reduce the risk of business failure
  • provide transparency for shareholders about their investment
  • help coordinate the different business functions
  • key context for making investment decisions
48
Q

what does net mean

A

before tax (overall)

49
Q

where does cash flow differ from profit

A
  • timing differences
  • the way fixed assets are accounted for
  • cash flows arising from the way business is financed
50
Q

whats depreciation

A

where it loses money over time

51
Q

what are the three types of profit

A
  • gross profit
  • operating profit
  • profit for the year
52
Q

whats gross profit

A

profit where the cost of sales has been taken off

53
Q

whats operating profit

A

profit where cost of sales and overheads being taken off

54
Q

whats profit for the year

A

profit where you take of all cost of sales, overheads, tax etc

55
Q

whats the definition of cost sales minimisation objectives

A

cost minimisation to achieve the most cost-effective way of delivering goods ands services to required level of quality

56
Q

what are the revenue objectives

A
  • revenue growth (percentage or value)
  • sales maximisation
  • market share
57
Q

key benefits of effective cost minimisation

A
  • lower unit costs (competitiveness)
  • higher gross profit margin
  • higher operating profits
  • improved cash flow
  • higher return on investment
58
Q

the most common profit objectives are

A
  • specific level or profit
  • rate of profitability
  • profit maximisation
  • exceed industry or market profit margins
59
Q

possible cash flow objectives

A
  • reduce borrowings to target levels
  • minimise interest costs
  • reduce amount held in inventories or owed by customers
  • reduce seasonal swings in cash flows
  • net cash flow as a percentage of net profit (eg 90% of operating profit)
60
Q

what is business investment

A
  • capital expenditure on items such as product machinery, IT systems, buildings etc
  • can also be the purchase of other business (takeovers) or brands
  • investments is intended to help generate a return (profit) over more than one year
61
Q

two common investment objectives

A

level of capital expenditure
- set at either an absolute amounts or as a percentage of revenues

return on investment
- usually set as a target % return, calculated by dividing operating profit by the amount of capital invested

62
Q

what is the capital structure of a business

A

the capital of a business represents the finance provided to its to enable it to operate over the long term. there are two parts to the capital structure which are EQUITY AND DEBT

63
Q

whats equity

A

the amount of money that a company’s owner has put into it or owns

64
Q

whats debt

A

the sum of money that is borrowed for a certain period of time and is to be return along with the interest

65
Q

debt to equity ratio formula

A

debt
——— x100
equity

66
Q

capital structure objectives

A

reasons for higher equity in the capital structure
- where is greater business risk
- where more flexibility required

reasons why high levels of debt can be an objective
- where interest rates are very low
- where profits and cash flows are strong; so debt can be repaid easily

67
Q

internal influences on financial objectives

A
  • business ownership
  • size and status of the business
  • other functional objectives
68
Q

external influences on financial objectives

A
  • economic conditions
  • competitors
  • social and political change
69
Q

what is a budget

A

a financially plan for the future that uses costs and revenue

70
Q

what is a person responsible for a budget called

A

a budget holder

71
Q

uses of budgets in management

A
  • forecast outcomes
  • improve efficiency
  • monitor performance
  • establish priorities
  • motivate staff
72
Q

principles of good budgeting

A
  • managerial responsibilities and clearly defined
  • manager have a responsibility to adhere to their budgets
  • performance is monitored against the budget
  • corrective action is taken if results differ significantly from the budget
  • unaccounted for variances are investigated
73
Q

two main approaches to budgeting

A

historical budgeting
- use last years figures as the basis for the budget
- realistic in that it is based on actual results
- however circumstances may have changed (eg new products, lost customers)
- doesn’t encourage efficiency

zero budgeting
- budgeting costs and revenues are set to zero
- budget is based on new proposals for sales and costs ie built from the bottom up
- makes budgeting more complicated

74
Q

whats income budget

A

represents the revenue you are projected to receive over the course of the fiscal year, and it is compared to your Income Actuals to track progress

75
Q

whats expenditure budget

A

shows the revenue and capital disbursements of various ministries/departments and presents the estimates in respect of each under ‘Plan’ and ‘Non-Plan’

76
Q

whats profit budget

A

a summary of expected income and expenses over a specified financial period.

77
Q

advantages of setting budgets

A
  • helps create financial stability
  • improves efficiency
  • provides direction
  • improves planning and control
78
Q

disadvantages of setting budget

A
  • time consuming
  • can be inflexible
  • can create competitions and conflict between teams or departments
  • if targets are unrealistic, employees could become stressed and under pressure
79
Q

what a budget is constructed

A

analyse market
to
draw up sales budget
to
draw up cost budget

80
Q

two key sources of information for budgets

A

finical performance in previous periods
- particularly for established businesses
- lots of relevant data likely to be available

market research
- trends in market size, growth, segmentation, product life cycles
- competitor activity
- customer feedback

81
Q

what is income budget

A
  • shows the budgeted income for a business and the sources
  • will help a firm to plan its workforce and operations
  • will allow a firm to plan its expenditure based on requirements to meet demand for example, order levels and staffing
  • only an estimate
82
Q

what is expenditure budget

A
  • shows the budgeted expenditure for a business
  • will include a range of different expenditure including raw materials, staff, marketing etc
83
Q

whats the profit budgeting formula

A

income budget - expenditure budget

84
Q

whats profit budget

A
  • important to ensure the firm makes a profit
  • should be viewed as a full year to remove seasonal impacts on demand
85
Q

what are methods of setting budgets

A
  • budgeting accord to company objectives
  • budgeting according to competitors spending
  • setting the budget as a percentage of sales revenue
  • budgeting according to last years budget allocation
86
Q

whats zero budgeting

A
  • all budgets start at zero and budget holders must purify why any expenditure is necessary before it is approved. Budgets are then set based on the strength of the justification linked to company objectives
87
Q

advantages of zero budgeting

A
  • encourages more thorough planning and consideration about spending
  • helps to identify change in an organisations needs to ensure those areas of the business that are growing and need more finance get it
  • helps to save money by cutting costs where managers are unable to justify their spending
88
Q

disadvantages of zero budgeting

A
  • it can be very time consuming for budget holders
  • managers who are better at negotiating or presenting may acquire bigger budgets despite needs of other departments
89
Q

reasons for setting budgets

A
  • helps to gain investment or finance
  • financial control
  • monitoring and review
  • allows firms to establish their priorities
  • improving staff performance and better accuracy
  • assign responsibility
90
Q

benefits of budgets

A
  • they provide direction and co-ordination which may motivate staff to work towards company objectives
  • budgets can act as SMART objectives to measure performance against
  • they improve efficiency by eliminating waste and overspending
  • they encourage careful planning which improves comany performance
91
Q

drawbacks of budgets

A
  • allocations may be incorrect and unfair
  • short term savings may be made to meet budgets that are not in the interests of the firm in the longer term
  • they are difficult to monitor fairly
  • they may be inflexible
92
Q

whats the definition of variance analysis

A

calculating and investigating the differences between the actual results and the budget

93
Q

variance formula

A

budget figure - actual figure

94
Q

whats favourable variances

A

when costs are lower than expected or revenue is higher.

95
Q

whats adverse variances

A

actual figures are worse then budget figure

96
Q

possible causes of favourable variances

A
  • stronger market demand than expected = higher actual revenue
  • selling price increased higher than budget
  • cautious sales and cost assumptions
  • competitor weakness leading to higher sales
  • better than expected productivity or efficiency
97
Q

possible causes of adverse variances

A
  • unexpected events lead to unbudgeted costs
  • over spends by budget holders
  • sales forecasts prove over optimistic
  • market conditions (eg competitor actions) mean selling prices are lower than budget
98
Q

whats management by exception

A

focusing on activity that require attention, not those that are running smoothly

99
Q

what should management do with a variance

A
  • act only if the variances is outside an agreed margin, don’t waste time
  • investigate the cause of a significant variance
  • was it avoidable or unavoidable?
  • act to remedy the problem, if appropriate
100
Q

problems and limitations of budgets

A
  • are only good as the data being used
  • can lead to inflexibility in decision making
  • need to be changed as circumstances change
  • take time to complete and manage
  • can result in short term decisions to keep within the budget

A-Level Business (15 decks)

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