unit 5 Flashcards
1
Q
what is revenue
A
the money received from sales of goods or service
2
Q
calculation for revenue
A
selling price x items sold
3
Q
what are fixed costs
A
cost that don’t change directly with the level of output
they will increase as the firm grows
4
Q
what are variable costs
A
costs that change directly with output
5
Q
formula for total costs
A
total fixed costs + total variable costs
6
Q
why is profit important
A
reinvested
keep share holders happy (dividends)
pay taxes
attract shareholders
7
Q
what tax do business have to pay
A
corporation tax
8
Q
how much is corporation tax
A
20%
9
Q
what are overheads
A
the costs of a business that don’t directly contribute tp the cost of making the product of preforming the service.
10
Q
what’s cashflow
A
the money coming in and out of the business
11
Q
what’s the main reasons business fails
A
cashflow
12
Q
examples of cashflow
A
cash sales
grants
loands
share capital invested
intrest on banks
13
Q
examples of cash outflows
A
payment to suppliers
wages and salaries
tax on profits
intrest on loan and overdraft
dividends to share holders
14
Q
what is meant by cashflow problems
A
when a business does not have enough cash to be able to pay its liabilities
15
Q
main causes of cash flow problems
A
low profits
too much production capacity
excess inventories held
allowing customers to take their time paying you
overtrading, business growing to fast
unexpected change in the business
seasonal demand
16
Q
problems with allowing customers too much credit
A
late payment is a common problem
the debt may go ‘bad’
17
Q
problems with too much stock
A
if its food it can go out of date
products can spoil
18
Q
problems with overtrading
A
keen to open new outlets
pay rent in advance, shop fitting, stock
19
Q
problems with seasonal demand
A
item you sell might only be wanted at one point in a year
20
Q
what is debt factoring
A
sells its debts to a third party company who then makes profit off debt. (company is owed 100,000 third party pays 80,000 and keep 20,000, debt company pays full 100,000)
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.
22
Q
what’s a contingency fund
A
a reserve of money set aside to cover possible unforeseen future expenses
23
Q
why produce a cash flow forecast
A
advanced warning of cash shortages
make sure business can afford to pay suppliers and employees
24
Q
problems with cash flow forecasts
A
-sales prove lower then expected
-customers don’t pay on time
-costs prove higher then expected
-imprudent (unwise) cost assumptions
25
what is working capital
money available to a company for day-to-day operations
26
what do effective working capital management focuses on
inventories, debtors, creditors
27
how to improve working capital (debtors)
amounts owed by customers
28
how to improve working capital (creditors)
amounts owed to suppliers
29
how to improve working capital (inventories)
cash tied unpin raw materials, work in progress and finished goods
30
ways to manage amounts owed by customers
-credit control
-selling off debts to debt factors
-cash discounts for prompt payment
-improve record keeping
31
ways to improve the cash position (short term)
-reduce current assets (stock, debtors)
-increase current liabilities (delay payments)
-sell surplus fixed assets
32
ways to improve the cash position (long term)
-increase equity finance
-increase long term liabilities
-reduce net outflow on fixed assets
33
difficulties improving cashflows
-not be babe to reduce stock levels
-gaining access to sources of finance
-cost of finance (interest charged)
-analyse firms performance (where its gone wrong)
-impact on brand imagine (location change)
-short-term effects long-term (cheaper suppliers = impact quality of product =poor image and lower future sales)
34
what does a fixed costs line/graph look like
straight lines/steps
35
what does a variable costs line/graph look like
diagonal
36
how to measure contribution
- total contribution
- contribution per unit
37
what's total contribution
difference between total sales revenue and the total variable costs
38
breakeven output formula
fixed costs (£)
----------------------------------
contribution per unit (£)
39
total contribution formula
total sales - total variable costs
40
formula for contribution per unit
selling price - variable cost per unit
41
3 ways to calculate breakeven
- table
- graph
- formula
42
breakeven key assumptions
- selling price stay same, regardless
amount produced
- variable cost vary in direct proportion
to output (variable cost per unit is the
same)
- all output is sold
- fixed costs don't vary with output
(they stay the same)
43
margin of safety formula (MOS)
actual output - break-even output
44
what does margin of safety show (MOS)
how much output you can afford to lose without a loss
45
how to change breakeven point
- increase/decrease price
- increase/decrease price
- increase/decrease costs
46
strengths of breakeven analysis
- focuses on what output is required
before a business reaches profitability
- helps management & finance-
providers better understand the
viability and risk of a business or
business idea
- MOS 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
47
what is a financial objective
a specific goal or target of relating to the financial performance, resources and structure of a business
48
benefits of using financial objectives
- a focus for the entire business
- important measure of success or
failure to a 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
49
how does cash flow differ from profit
- timing
- ways fixed assets are accounted for
- cash flows arising from the way the
business is financed
50
what is a fixed asset
a long-term tangible piece of property or equipment that a firm owns and uses in its operations to generate income (house, land)
51
what are the three types of profit are called
- gross profit
- operating profit
- profit for the year
52
why do businesses have three types of profit
to analyse how each part of the business is doing
53
types of revenue objectives
- revenue growth
- sales maximisation
- market share
54
what is cost minimisation
aims to achieve the most cost-effective way of delivering goods and services to the required level of quality
55
key benefits of effective cost minimisation
- lower unit costs
- higher gross profit margin
- higher operating profits
- improved cash flow
- higher ROI
56
types of operating objectives
- specific level of profit
- rate of probability
- profit maximisation
- exceed industry or market profit
margins
57
possible cash flow objectives
- reduce borrowings to target level
- minimise interest costs
- reduce seasonal swings in cashflow
- reduce amounts held in inventories
58
what is business investment
- buy machinery, IT, buildings
- buy businesses (takeover)
- helps boost profits
59
what are the two common investment objectives
- level of capital expenditure (5mil a
year/5% of revenue)
- ROI
60
what are the two parts to capital structure
- equity
- debt
61
what is equity
- amount invested by the owners
- she capital, retained profit
62
what is debt
- finance provided to the business by
external parties
- bank loan, other long-term debt
63
what is the debt/equity ratio
debt 200
------------------- X 100 = 25%
equity 800
64
reasons for higher equity in the capital structure
- where there is greater business risk
- where more flexibility required
65
reasons why high levels of debt can be an objective
- where interest rates are very low
- where profits and cash flows are
strong (debt paid easily)
66
internal influences on finical objectives
- business ownership
- size and status of the business
- other functional objectives
67
external influences on finical objectives
- economic conditions
- competitors
- social and political change
68
what is a budget
financial plan for the future concerning the revenues and costs of a business
69
what uses does budgets have in management
- motivate staff
- establish targets
- communicate targets
- forecast outcomes
- assign responsibility
70
principles of good budgeting
- responsibilities clearly defined
- performance is monitored
- corrective action
71
what are the two main approaches to budgeting
- historical
- zero
72
73
74
how is a profit budget constructed
- analyse Markey
- draw up sales budget
- draw up cost budget
75
what is income budget
- shows the budgeted income for a
business and the sources
- help firm to plan its workforce and
operations
- plan its expenditure based on
requirements to meet demand
76
what are the three main types of budgeting
- income budget
- expenditure budget
- profit budget
77
what are two key sources of information for budgets
- finance performance in past periods
- market research
78
what is expenditure budgeting
- shows the budgeted expenditure
- include a range of different
expenditure including, raw materials,
stand, rent, insurance
79
what is profit budget
- important to ensure the firm makes
profit
- viewed as a full year to remove
seasonal impacts on demand
80
what is the profit budget formula
income budget - expenditure budget
81
methods of setting budgets
- budgeting according to company
objectives
- budgeting according to competitors
spending
- setting the budget as a percentage of
sales revenue
- budgeting according to last years
budget allocation
- zero budgeting
82
what is zero budgeting
budgets start at zero and budget holders must justify why any expenditure is necessary before it is approved. budgets then set based on the strength of the justification linked to company objectives
83
advantages of of zero budgeting
- encourages more thorough planning
and consideration about spending
- helps identify changes in an
organisation needs and ensures those
areas of the business that are growing
and need more finance get it
- helps save money by cutting costs
84
disadvantages of zero budgeting
- can e very time consuming for budget
holders
- managers who are better at
negotiating or presenting may acquire
bigger budgets despite needs of other
departments
85
difficulties in budgeting accurately
- sales forecasting
- costs
86
reasons for setting budgeting
- helps to gain investment
- financial control
- monitoring and review
- allows firms to established their
priorities
- improving staff performance and
better accuracy
- assign responsibility
87
problems of setting budgets
- imposed budgets
- research problems and accuracy
- unforeseen changes
- time taken in setting budgets
88
benefits of budgeting
- motivate staff
- SMART objectives
- improve efficiency
- encourage carful planning - company
performance
89
drawbacks of budgeting
- allocations incorrect + unfair
- difficult to monitor fairly
- they may be inflexible
90
definition of variance analysis
calculating and investigating the differences between actual results and the budget
91
variance analysis formula
budget figure - actual figure
91
what is favourable variance
positive - better then expected
92
what is adverse variance
negative - worse then expected
93
possible causes of favourable variances
- stronger market demand
- selling prices increased
- competitor weakness - higher sales
- better then expected productivity
94
possible causes of adverse variances
- unexpected events (covid)
- over-spends by budget holders
- sales forecast prove over-optimistic
- market conditions, selling price lower
95
do variances matter? it depends on....
- was the variance foreseen
- size
- cause
- wether its a temporary problem or -
long term
96
what is management by exception
focusing on activities that require attention not those that are running smoothly
97
what should management do with variance
- act only if the variance is outside an
agreed margin - don't waste time
- investigate the cause of a significant
variance
- was it avoidable or not
- act to remedy the problem
98
problems and limitations of budgets
- only as good as the data being used
- lead to inflexibility in decision making
- need to change as circumstances
change
- take time to complete and manage
- result in short-tern decision to keep
within the budget
99
behavioural implications of budgets
- demotivating
- set unrealistic targets
- departmental rivalry
- spending put to budget, use it or lose
it
