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39 Cards in this Set
- Front
- Back
Formula for Profit? |
profit= revenue - total costs
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What is revenue?
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Revenues are the earnings or income generated by a firm as a result of its trading activities
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What is fixed costs?
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are costs that do not alter when the business alters its level of output. E.g rent and rates
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What is variable costs?
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alter directly with the business's level of output. e.g fuel costs
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What is total costs?
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are fixed and variable costs added together
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What is break-even analysis?
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is that level of output at which a firm's sales generate just enough revenue to cover all the costs of production.
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What is contribution?
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the difference between sales revenue and variable costs of production
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formula for break even?
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fixed costs / contribution per unit ( S.P. per unit - variable costs per unit )
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Advantages of break even analysis
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* it is a simple technique allowing most managers to use it without the need for expensive training.
* It is a technique that can be completed quickly. * Its use can be of value in supporting a business's application to a bank for a loan. * By using break-even charts a business can forecast the effect of varying numbers of customers on its costs, revenues and profits. |
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Disadvantages of break even analysis
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* it assumes the all products are sold
* Costs do not rise steadily, variable costs can rise less quickly than output because of the benefits of buying in bulk. * A break even analysis will only be as accurate as the data on which it is based. If costs or selling prices are incorrect, then the forecasts will be wrong. |
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What is cash flow?
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cash flow is the movement of cash into and out of a business over a period of time.
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What is cash flow forecasts?
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it states the inflows and outflows of cash that managers of a business expect over some future period.
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Why do business forecast cash flows?
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* To make sure that they do not suffer from periods when they are short of cash and are unable to pay debts.
* To support applications for loans. |
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What are the causes of cash flow problems?
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* Overtrading - this occurs when a business expands quickly without organizing funds to finance the expansion.
* Allowing too much credit * Poor credit control |
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What is trade credit?
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is offered when purchasers are allowed a period of time to pay for products they have bought
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Factors that lead to incorrect cash flow forecasts?
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* incorrect assumptions - people may make mistakes regarding the future levels of sales for the business or the prices they will receive for their products.
* Unexpected costs - prices of raw materials may increase without warning. * Inexperience - this is often the cause of poor quality cash flow forecasting. |
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What is working capital?
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is the finance available to the business for its day-to-day trading activities. Working capital is availible to a business when customers pay for the products they have received. Working capital is used to pay wages, and for fuel and raw materials.
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Methods of improving cash flow?
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* Improved control of working capital.
* Negotiate improved terms for trade credit. * Debt factoring - a frim can receive cash by selling its debts to a debt factor. * Arrange short term borrowing * Sale and leaseback - It entails a business selling a major asset. |
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Methods of getting money in short term?
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*Trade credit
* Overdrafts *Debt factoring |
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Methods of getting money in medium term?
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*leasing
* bank loans |
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What is assets?
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are anything owned by a business from which it can benefit. e.g. land , cars , stocks
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What is collateral?
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is the security to back up a request for a loan.
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Methods of getting money in long term?
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* Reinvesting profits
*Mortgages - are long term loans for the purchase of land and buildings. The land or building is used as security for the loan - it acts as collateral. * Share or equitiy capital - sell shares in their business to investors |
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What are debentures?
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They are a special type of loan. They are long term loans on which businesses have to pay a fixed rate of interest.
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What are budgets?
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are financial plans for the future looking at revenue from sales and expected costs over some time period.
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Why do businesses draw up budget.?
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* Budget assist business to control their finances by planning their expenditure over a future period.
* Budgets are an effective way of ensuring that a business does not spend more than it should. |
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What is a budget holder?
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is responsible for the use and management of a particular budget.
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What are delegated budget?
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exist when firms give control over budgets to relatively junior employees
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What are the difficulties in setting budgets?
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* If sales budgets are set too high and are unachievable, they can demotivate sales employees and damage the sales performance of the business.
* Production budgets which are set impossibly low might be ignored * Equally, budgets that are very simple to achieve will notmotivate employees or improve their performance. |
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What are zero budgets?
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exist when budgets are automatically set at zero and budget-holders have to argue their case to receive funds.
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What are variance analysis?
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is the process of investigating any differences between forecast data and actual figures.
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What are favourable variances?
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exists when the difference between budgeted figures will result in the business enjoying higher profits than shown in the budget.
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What are adverse variances?
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occurs when the difference between figures in the budget and the actual figures will lead to the firm's profit being lower than planned.
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Advantages of budgets.
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* Control of finances - Production or expenditure budgets allow managers to ensure that a business does not overspend.
* Motivation and appraisal - Budgets can be used to motivate employees - Employees can gain satisfaction from being given responsibility for a budget. * |
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Disadvantages of budgets
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* Training requirements - If a business intends that significant proportion of its employees should manage budgets.
* Allocation of funds - Allocating budgets fairly and in the best interest of the business is difficult. * Short term versus long term planning - budgets normally relate to the current financial year only. |
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What is a cost centre?
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is a distinct part of a business for which costs can be calculated.
* A profit centre - is similar to a cost centre, being a part of a business for which costs and revenues can be determined |
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Why operate cost and revenues centres?
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Businesses gain more detailed information from running a number of seperate cost and profit centres, rather than merging all the figures into a single set of financial statements.
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Advantages of cost and profit centres?
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* Cost and profit centres allow firms to assess the performance of individual parts of their business.
Profit and cost centres allow businesses to take appropriate decisions at a local level * Many firms have decided to give greater responsibility to more junior employees as part of a policy designed to motivate employees |
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Disdvantages of cost and profit centres?
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* Employees might be unprepared for the new responsibility.
* Creating a number of profit or cost centres within a business can develop rivalry between the areas. * In some circumstances it is very difficult to divide up costs to create a cost or profit centres |