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Theme 2 Paper 2 - Coggle Diagram
Theme 2 Paper 2
Break Even
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The break even point shows the point where total costs are exactly the same as total revenue, so the business is neither making a profit or a loss
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What a Break Even Chart shows:
- the profit made at a particular level of output
- Where losses of made at levels of output below the breakeven point
- Where profits are made at levels of output above the breakeven point
-The relationship between fix costs and variable costs as output rises
Budgets
The purpose of budgets:
- planning: plan for the future and anticipate problems
- control and monitoring: management can set objectives and targets.
- efficiency: can give financial control to lower levels of management who can make decisions at their point in the organisation
- motivation: acts as a motivator
Types of budget:
- zero based budget: where costs cant be justified, no money is allocated into the budget.
- Advantages: reduces unnecessary costs, encourages managers to look for alternatives
- Disadvantages: time consuming, needs skillful decision making
Variances:
- Favourable variances occur when the actual figures are better than the budgeted figures.
- Adverse variances occur when actual figures are worse than budgeted figures
Difficulties of budgeting:
- setting budgets: conflicts between departments with what budget to set, inaccurate data
- manipulation: manipulation with budgeting can motivate staff in the short term, but may not meet objectives in the long term
- motivation: unrealistic budgets demotivate staff
Profit
Formulas:
- Gross profit = Revenue - Cost of sales
- Operating profit = Gross Profit - Operating expenses
- Net Profit = Operating profit - interest
- Gross profit margin = (Gross profit / revenue) x 100
- Operting Profit margin = Operating profit / revenue) x 100
- Net profit margin = (net profit before tax / revenue) x 100
Statement of Comprehensive Income: shows the inflows and outflows of a business during the financial year. It is used to calculate gross profit, operating profit and net profit
Ways to improve profitability:
- rising prices
- lowering costs
Distinction between profit and cash:
- profit is the amount of money left over after all expenses are paid
- cash is the amount of money currently or soon to be available
Liquidity
Statement of Financial position/balance sheet:
- the value of assets will equal the value of liabilities and capital.
- Assets = Capital + Liabilities
Balance sheet includes:
- non current assets: long term resources
- current assets: short term resources, likely to be sold within 12 months
- current liabilities: money owed that is repaid in 1 year
- non current liabilities: long term debts
- shareholders equity: what is owed to the business owners
Formulas:
- Current ratio = current assets/current liabilities
- Acid test ratio = current assets - inventories/current liabilities
- Working Capital = current assets - current liabilities
Ways to improve liquidity:
- overdraft
- sell stock and encourage cash sales
- negotiate loans
- only make essential purchases
How to manage working capital:
Working capital is the amount of money needed to pay for the day-to-day trading of a business. It is used to pay expenses such as wages, electricity and gas, and to buy components to make products. It is the money left over after all current debts have been paid.
- If it is a large business they will need large amounts of work in capital
- If a business doesn’t carry enough stocks of raw materials it may find that production is halted, therefore it might be unable to fulfil its orders on time.
- If there is not enough cash in the business it might not be able to pay bills on time
Capacity Utilisation
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Ways to improve capacity utilisation:
- rationalise: sell unused assets/machinery/offload staff/mothball machinery
- increase sales
- outsourcing: hire another business to do work that used to be done 'in-house'
- move to smaller premises