Business AS Accounting and Finance

Key terms, Definitions and advantages and disadvantages. Suitable for AS Business Studies

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  • Created by: Joshua
  • Created on: 21-05-08 13:48

Elasticity of Demand Cont...

Difficulties in using Elasticity of Demand

  • There may have been significant changes to the market e.g. consumers tastes
  • Changes in price may provoke a reaction from rival firms by matching the change or modifying their market in response to the change
  • Consumers may react differently to increase the price
  • Consumers may not be able to predict how their spending will be affected by price or income changes
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Costs, Profit and Contribution

Profit: the difference between the income of a business and its total cost

e.g. Profit = revenue - total costs

Revenue: a measure of the income received from an organisation's activities

e.g. Revenue = total costs + profit

Two ways of improving profit:

  • Increase sales revenue
  • Decrease costs

Fixed Costs: Costs which do not vary with the level of output in the short terme.g. rent

Variable Costs: Costs which vary with the level of output in the short term e.g. raw materials

Total Costs: The sum of fixed costs and variable costs (fixed costs + variable costs)

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Costs, Profit and Contribution Cont...

Direct Costs: Costs that can be related directly to the product or service e.g. raw materials

Indirect Costs (Overheads): Costs that can not be relateddirectly to the product or service guards salary

Contribution: Whether an individual product or activity is helping a business pay off the fixed costs or make profit. It concentrates on the direct costs whether the sales revenue is greater than the direct costs...Making profit

Contribution Per Unit: Selling Priceper unit -Direct Cost per unit

Total Contribution: Contribution per unit x number of units sold


Sales Revenue - Direct Costs

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Breakeven Analysis

Breakeven Output: the level of output in which total sales revenue is equal to the total costs of production

In order for breakeven:

  • Selling price remains the same regardless of unitssold
  • Fixed costs remain the same regardless of units of output
  • Variable costs vary in direct proportion to output
  • Every unit of output that is produced is sold

Breakeven output = Fixed Costs (£)/Contribution per unit (£)

Advantages of Breakeven Analysis:

  • It can show different levels of profit arising from the various levels of output which allows a business to predict its profit levels
  • It can be used to calculate how long will it take for a firm to reach the level of output needed to make a profit
  • Quick and easy to complete (calculations)

Target profit output = Fixed Costs (£) + Target Profit (£)/Contribution per unit (£)

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Breakeven Analysis Cont...

Disadvantages of Breakeven Analysis:

  • The information can be unreliable if the breakeven charts are based on forecasts it would be difficult to predict the number of customers who will but the product
  • Selling price may change as more is purchased e.g. if price increases then demand will decrease
  • Fixed costs may not stay the same as output increases
  • Variable costs per unit will decline for larger firms when they want to get into bulk buying
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Cash Flow Management

Cash Flow: the amounts of money flowing in and out of a business over a period of time

Net cash flow: Cash Inflows - Cash Outflows over a period of time

Cash Inflows: Receipts of cash arising from sales of items, payments by debtors, loans received etc

Cash Outflows: Payments of cash arising from the purchases of iterms, payments to creditors, loans repaid or given ect

Cash Flow Forecasting: The process of estimating the expected cash inflows and outflows over a period of time

Cash Flow Forecasting is used to:

  • Make sure there is sufficient cash for suppliers and creditors and to make other payments
  • Provide evidence in support of a request for financial assistance e.g. asking a bank for an overdraft
  • Avoid going into liquidation
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Cash Flow Management Cont...

Perils of using cash-flow forecasting:

  • Changes in the economy- e.g. unemployment levels rising means people don't have enough money to spend which decrease levels of sales
  • Changes in consumer tastes- changes of opinions mostly with fashion and technology
  • Competition - can affect level of firm's usccess

Causes of cash-flow problems:

  • Seasonal demand
  • Overtrading
  • Credit sales
  • Poor stock management
  • Unforseen changes
  • Low profits or losses

Factoring: A company (usually a bank) buys the rights to collect money from the credit sales of an organisation. Usally 80% of sales 15% on receipt of the debt and the 5% is loss of revenue depending on the length of time which is how the factoring company charge for its service

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Cash Flow Management Cont...

Working Capital: the day to day finances in the business, consisting of assets

(e.g. cash, stock, debtors) minus liabilities (e.g. creditors and overdrafts)

Ways of improving cash flow:

  • Diversify the product portfolio creating a range of sales through out the year
  • Improved decision making procedures, planning, monitoring and control and more through market research

Liquidity: the ability to convert an asset into cash without loss or delay

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Sources of Finance

Trading Profit: Difference between the income received and an organisation's normal activities and expenditure it incurs in operating

Retained Profit: Part of the firm's proft which is re-invested in the business rather than distributing it to shareholders

Asset: Any item owned by the firm

Selling assets will allow a business to fund other ventures:

  • Can sell assets if in a cash flow crisis as a short term source of finance
  • The firm no longer needs assets and uses the funds from the assets to expand more profitable parts of the business
  • If it has found a more profitable venture so it needs funds to develop that venture
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Sources of Finance

Veture Capital: Individuals known as business angels whol finance small or medium sized firms that seek growth. It can take the form of a loan or payment in return for share capital

Loan Capital: Money received from an organisation in return for organisation to pay interest during the period of the loan (known as creditors)

Debenture: Long term loan made to a business at an agreed fixed percentage rate of interest

Bank Loans: Sum of money provided to a firm by a bank for a specific need or purpose and will expect a fixed rate of interest over a period of time. They can be set for any length of time

Bank overdraft: When a bank allows an individual or organisation to overspend its current account in the bank up to an agreed overdraft limit

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Budget: An agreed plan establishing in numerical or financial terms, the policy to be pursued and the anticipated outcomes of that policy

Management Accounting: Financial and accounting information for internal purposes of planning, review and control. Based on predictions on what will happen and analysis on the outcomes.

Role of a budget:

  • To ensure the business does not overspend
  • To establish key priorities
  • To assign responsibility
  • To improve efficiency

Problems of setting budgets:

  • Managers may not know enough about the division or department
  • Unforseen changes
  • Level of inflation (price rises) hard to predict
  • Time consuming
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Budgeting Cont...

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