Business revision, Budgets and Managing finance (2.2.4/2.3.1)

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What is the purpose of budgets?
To ensure that the company has complete control over its incomings and outgoings.
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What is planning?
Budgets help businesses prepare so that they can achieve their main aims and objectives. For example, a business may aim to increase productivity by 20%, they can use planning to achieve this.
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What is forecasting?
Businesses use cash flow forecasts in order to predict what funds they will have available to pay which bills on which month. Forecasts allow businesses to make sure that they do not go under during periods of low sales.
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How can communications be used when budgeting?
Businesses use communication to inform staff of what targets they need to reach. Companies also use them in order to keep management informed of business aims and what spending they have available for the next six months of the year.
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How can motivation be used when budgeting?
Once businesses have delegated targets to staff they can then use these targets as a way to measure staffs success. These can then be used to decide who should be rewarded.
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What is a 'historical figure' budget?
This type of budget uses the figures from previous periods in order to create the next budget. A business that gave its marketing department £1000 e.g would do the same thing again this year.
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What are the advantages of historical budgeting?
Efficient to implement, Easier to plan for the future, Easier to operate departments, Budget is often stable
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What are the disadvantages of historical budgeting?
The budget will assume each department will operate the same every year, no incentive for developing ideas, encourages spending the max amount, no encouragement for reduced costs or change in spending.
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What is a zero based budget?
This budget clears all budgets every period and starts everyone off at zero. This means that each department must present a proposal to the company to explain what budget they need and why.
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What are the advantages of a zero based budget?
Stops companies from creating unnecessarily large budgets, Departments can only make purchases because they have proven there is a genuine business requirement.
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What are the disadvantages of a zero based budgets?
Can be time consuming as they have to plan and implement the budget. Extra staff required to produce the budget.
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What is variance analysis?
Businesses use this form of analysis after a budgeting period to show how their spending compared with the budget they set out to meet. Analysis can either be adverse or favourable.
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If a business sales department is budgeted £2500, for example, and they end up only spending £2000. Is this adverse or favourable? And how much by?
This would be favourable by £500.
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Using the same example, what if the department spent £3500?
This would be £1000 adverse.
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What is meant by contribution?
The difference between the variable costs of producing a good or service and the amount of revenue a company earns from selling it.
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What is the calculation for gross profit?
Gross profit = revenue - cost of sales
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What does it show?
Allows the company to calculate the added value that they earn on the raw materials needed to produce their products.
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All together, the raw materials, supplies and labour amounted to £6000 for the year. The sales revenue for the business was £14000. What is the gross profit?
Gross profit = revenue - cost of goods gross profit = 14,000-6,000 = £8000. Gross profit = £8,000
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What is the alternative equation for 'cost of sales for all'
Opening stock, +stock bought - closing stock = cost of sales
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What is operating profit?
Operating profit shows the profit left over after other operating costs (aka fixed costs) have also been deducted. These expenses are the costs to the business of their key activities, such as day to day admin.
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What is the calculation for operating profit?
Operating profit = gross profit - other operating expenses
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Why is operating profit often looked more at rather than gross profit?
Because it gives a more realistic idea of how much profit the business has actually made.
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What is net profit?
Usually found on the final line of a company's statement of comprehensive income.
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What is the calculation for net profit?
Net profit = operating profit - interest
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What should always be at the top on a profit and loss account?
Sales revenue
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What comes under sales revenue?
Raw materials, Production supplies and Labour costs.
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What comes underneath these 3?
Cost of sales
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How is Gross profit worked out from the profit and loss account?
sales revenue - cost of sales = Gross Profit
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What comes under gross profit?
Business expenses, Administrative expenses.
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What do these total to?
Other operating expenses.
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What are the final three things under 'Other operating expenses'?
Operating profit, Interest paid, Net profit.
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What are the 12 aspects to a profit n loss account?
1) Sales revenue 2) Raw materials 3) Production supplies 4) Labour costs 5) Cost of sales 6) Gross profit 7) Business expenses 8) Administrative expenses 9) Other operating costs 10) Operating profit 11) Interest paid 12) Net profit
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What are the 7 key aspects a profit and loss account?
Sales rev, Cost of sales, Gross profit, Other operating expenses, Operating profit, Interest paid, Net profit.
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How do you calculate operating profit on a profit and loss account?
gross profit - operating expenses
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What is profitability?
Profit and loss accounts are used to calculate a firms profitability. Profitability is their ability to turn revenue into profit- this is shown as a ratio - how much of the company's sales revenue represents profit.
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What does gross profit margin show?
Shows how much of a company's sales revenue represents actual gross profit.
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What is the calculation for gross profit margin?
Gross profit margin = (gross profit / revenue) x 100
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What does operating profit margin show?
It shows how much of a company's sales revenue represents actual operating profit.
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What is the calculation for operating profit margin?
Operating profit margin = (operating profit / revenue) x 100
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What does net profit margin show?
How much of a company's sales revenue represents actual net profit.
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What is the calculation for net profit margin?
Net profit margin = (net profit / revenue) x 100
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How can businesses increase profitability and the difference between cash and profit?
Decrease cost of sales by reducing amount of raw materials, Generate higher sales by increasing promotion, Increase efficiency of staff, Produce more goods (if there is demand), Evaluate how much of the company's day to day expenses are essential.
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Other cards in this set

Card 2

Front

What is planning?

Back

Budgets help businesses prepare so that they can achieve their main aims and objectives. For example, a business may aim to increase productivity by 20%, they can use planning to achieve this.

Card 3

Front

What is forecasting?

Back

Preview of the front of card 3

Card 4

Front

How can communications be used when budgeting?

Back

Preview of the front of card 4

Card 5

Front

How can motivation be used when budgeting?

Back

Preview of the front of card 5
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