Business AS Accounting and Finance

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

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)

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 e.g.security 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

or

Sales Revenue - Direct Costs

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 (£)

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

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

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

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

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

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

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