Business Studies

Front 1

Formula for Profit?

Back 1

profit= revenue - total costs

Front 2

What is revenue?

Back 2

Revenues are the earnings or income generated by a firm as a result of its trading activities

Front 3

What is fixed costs?

Back 3

are costs that do not alter when the business alters its level of output. E.g rent and rates

Front 4

What is variable costs?

Back 4

alter directly with the business's level of output. e.g fuel costs

Front 5

What is total costs?

Back 5

are fixed and variable costs added together

Front 6

What is break-even analysis?

Back 6

is that level of output at which a firm's sales generate just enough revenue to cover all the costs of production.

Front 7

What is contribution?

Back 7

the difference between sales revenue and variable costs of production

Front 8

formula for break even?

Back 8

fixed costs / contribution per unit ( S.P. per unit - variable costs per unit )

Front 9

Advantages of break even analysis

Back 9

* 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.

Front 10

Disadvantages of break even analysis

Back 10

* 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.

Front 11

What is cash flow?

Back 11

cash flow is the movement of cash into and out of a business over a period of time.

Front 12

What is cash flow forecasts?

Back 12

it states the inflows and outflows of cash that managers of a business expect over some future period.

Front 13

Why do business forecast cash flows?

Back 13

* 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.

Front 14

What are the causes of cash flow problems?

Back 14

* Overtrading - this occurs when a business expands quickly without organizing funds to finance the expansion.
* Allowing too much credit
* Poor credit control

Front 15

What is trade credit?

Back 15

is offered when purchasers are allowed a period of time to pay for products they have bought

Front 16

Factors that lead to incorrect cash flow forecasts?

Back 16

* 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.

Front 17

What is working capital?

Back 17

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.

Front 18

Methods of improving cash flow?

Back 18

* 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.

Front 19

Methods of getting money in short term?

Back 19

*Trade credit
* Overdrafts
*Debt factoring

Front 20

Methods of getting money in medium term?

Back 20

*leasing
* bank loans

Front 21

What is assets?

Back 21

are anything owned by a business from which it can benefit. e.g. land , cars , stocks

Front 22

What is collateral?

Back 22

is the security to back up a request for a loan.

Front 23

Methods of getting money in long term?

Back 23

* 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

Front 24

What are debentures?

Back 24

They are a special type of loan. They are long term loans on which businesses have to pay a fixed rate of interest.

Front 25

What are budgets?

Back 25

are financial plans for the future looking at revenue from sales and expected costs over some time period.

Front 26

Why do businesses draw up budget.?

Back 26

* 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.

Front 27

What is a budget holder?

Back 27

is responsible for the use and management of a particular budget.

Front 28

What are delegated budget?

Back 28

exist when firms give control over budgets to relatively junior employees

Front 29

What are the difficulties in setting budgets?

Back 29

* 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.

Front 30

What are zero budgets?

Back 30

exist when budgets are automatically set at zero and budget-holders have to argue their case to receive funds.

Front 31

What are variance analysis?

Back 31

is the process of investigating any differences between forecast data and actual figures.

Front 32

What are favourable variances?

Back 32

exists when the difference between budgeted figures will result in the business enjoying higher profits than shown in the budget.

Front 33

What are adverse variances?

Back 33

occurs when the difference between figures in the budget and the actual figures will lead to the firm's profit being lower than planned.

Front 34

Advantages of budgets.

Back 34

* 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.
*

Front 35

Disadvantages of budgets

Back 35

* 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.

Front 36

What is a cost centre?

Back 36

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

Front 37

Why operate cost and revenues centres?

Back 37

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.

Front 38

Advantages of cost and profit centres?

Back 38

* 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

Front 39

Disdvantages of cost and profit centres?

Back 39

* 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