5.2 Financial Performance (AQA A Level Business): Flashcards
Exam code: 7132
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- FrontBudgeting
Define a budget.
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Define a budget.
A budget is a financial plan that a business (or department) sets for its costs and revenue.
Name the three types of budget.
Revenue budget, expenditure budget, and profit budget.
What is a revenue budget?
A plan for how much money a business expects to bring in from sales and other income over a period.
What is a profit budget?
A plan that combines revenue and expenditure budgets to forecast expected profit for the period.
Give one advantage of budgeting.
It aligns activities with objectives, highlights overspending quickly, and helps assess performance.
Give one disadvantage of budgeting.
It is time-consuming, can discourage seizing opportunities, and managers may manipulate figures to beat targets.
Define variance analysis.
Variance analysis compares actual performance to budgeted figures to find the reasons for the differences.
How is a budget variance calculated?
Variance = actual figure − budgeted figure.
What is a favourable variance?
Where the actual figure is better than budgeted — e.g. in a cost budget, actual cost lower than budgeted.
What is an adverse variance?
Where the actual figure is worse than budgeted — e.g. in a cost budget, actual cost higher than budgeted.
Budgeted profit is £4,040 and actual profit is £3,091. What is the profit variance?
£3,091 − £4,040 = −£949 (£949 Adverse).
A budget is usually set and then monitored on a monthly basis.
A budget is usually set annually and then monitored on a monthly basis.
In a cost budget, a favourable variance means the actual cost is than budgeted.
In a cost budget, a favourable variance means the actual cost is lower than budgeted.
True or False?
An adverse variance in a cost budget means actual costs were lower than budgeted.
False.
Adverse in a cost budget means actual costs are higher than budgeted; favourable means lower.
Give one cause of a favourable revenue variance.
A higher-than-planned selling price or stronger sales volume / new customers.
True or False?
Comparing actual results with the budget helps pinpoint good and poor performance.
True.
Comparing actual with budgeted figures pinpoints good and poor performance and can justify bonuses or training.
Define a cash flow forecast.
A cash flow forecast predicts the cash coming in and out of a business over a period, showing surpluses or shortages.
Give one use of a cash flow forecast.
It can support a loan application, identify cash shortfalls/surpluses, and aid planning.
Give one limitation of a cash flow forecast.
It is based on estimates (which may differ), needs skill and time, and may miss external factors.
Define net cash flow.
Net cash flow is total cash inflows minus total cash outflows in a period.
What is the opening balance on a cash flow forecast?
The previous month's closing balance carried forward.
How is the closing balance calculated?
Closing balance = opening balance + net cash flow.
Inflows are £8,600 and outflows are £4,770. What is the net cash flow?
£8,600 − £4,770 = £3,830.
If the opening balance is £500 and net cash flow is £3,830, what is the closing balance?
£500 + £3,830 = £4,330.
A cash inflow is cash a business in a specific period of time.
A cash inflow is cash entering a business in a specific period of time.
True or False?
A negative net cash flow always means a business is in crisis.
False.
A negative net cash flow means cash is leaving faster than it arrives — it needs watching but isn't always a crisis.
On a cash flow forecast, the opening balance plus net cash flow gives the balance.
On a cash flow forecast, the opening balance plus net cash flow gives the closing balance.
Why might a business include a cash flow forecast in its business plan?
To support a loan application, showing lenders where cash shortfalls may occur.
True or False?
The closing balance of one month becomes the opening balance of the next.
True.
Each month's closing balance carries forward as the next month's opening balance.
Sales are £46,000 with total outflows of £47,500. What is the net cash flow?
£46,000 − £47,500 = −£1,500.
Cash flow forecasts are usually based on , so actual figures may differ significantly.
Cash flow forecasts are usually based on estimates, so actual figures may differ significantly.
Define receivables (debtors).
Receivables are the amount of time customers take to pay a business.
Define payables (creditors).
Payables are the amount of time a business takes to pay its suppliers.
How do longer receivables terms affect cash flow?
They delay inflows — customers take longer to pay, so cash arrives more slowly.
How do longer payables terms affect cash flow?
They delay outflows — the business holds onto its cash for longer.
What does a negative closing balance indicate?
The business has run out of cash — urgent action is needed.
Name two ways to solve a cash flow problem.
Reduce customer credit, extend supplier payment, use an overdraft, sell excess stock, or introduce new capital (any two).
Why might reducing the credit period offered to customers improve cash flow?
Collecting money more quickly increases current assets — but customers may switch to rivals with better terms.
A falling closing balance is a warning sign that the business risks running out of .
A falling closing balance is a warning sign that the business risks running out of cash.
True or False?
Extending the time a business takes to pay suppliers improves its cash flow.
True.
Longer payable days boost cash, as money leaves the business later.
True or False?
Late customer payments improve a business's cash flow.
False.
Late customer payments create gaps between selling and receiving cash, worsening cash flow.
Why can holding too much cash be a problem?
It has an opportunity cost — the business misses out on investing it (e.g. in assets or savings).
The most suitable way to solve a short-term cash flow problem is often a flexible, short-term facility.
The most suitable way to solve a short-term cash flow problem is often a flexible, short-term overdraft facility.
Give one drawback of using an overdraft to solve a cash flow problem.
Current liabilities increase, and banks may be reluctant to lend to businesses with cash flow problems.
How can selling off excess stock improve cash flow?
It converts less liquid stock into cash and reduces storage costs — but stock may be sold at a low price.
True or False?
A negative net cash flow in one month always means the closing balance is negative.
False.
Not necessarily — a positive opening balance can keep the closing balance positive despite negative net cash flow.
Define break-even analysis.
Break-even analysis finds the point at which revenue equals total costs, giving neither profit nor loss.
What does break-even analysis tell a business?
The minimum level of sales/output needed to cover all costs, informing pricing and production decisions.
What three components does break-even analysis use?
Sales revenue, fixed costs, and variable costs.
Define fixed costs.
Fixed costs are costs that do not change as output changes — paid whether output is zero or 5,000.
Define variable costs.
Variable costs are costs that vary directly with output — they rise as output rises.
What three lines are drawn on a break-even chart?
Fixed costs, total costs, and revenue.
On a break-even chart, where is the break-even point?
Where the total costs and revenue lines cross each other.
On a break-even chart, how is profit shown?
As the space between the revenue and total costs lines (where revenue is higher).
On a break-even chart, the margin of safety is the difference between actual output and the point.
On a break-even chart, the margin of safety is the difference between actual output and the break-even point.
How does an increase in the selling price affect the break-even point?
It raises revenue at each output, so the break-even point falls (fewer units needed).
How does an increase in variable costs affect the break-even point?
It raises total costs, so the break-even point rises (more units must be sold).
How does a fall in fixed costs affect the break-even point?
It lowers total costs, so the break-even point falls and profitability comes sooner.
Give one benefit of break-even analysis.
Profitability assessment, cost control, pricing decisions, financial planning, and sensitivity analysis.
Give one limitation of break-even analysis.
It assumes all output is sold, is less useful for multi-product firms, and depends on data quality.
Break-even analysis is useful for communicating with stakeholders as it shows a business's financial .
Break-even analysis is useful for communicating with stakeholders as it shows a business's financial viability.
True or False?
On a break-even chart, the revenue line slopes more steeply than the total costs line.
True.
The revenue line slopes more steeply and crosses the total costs line at the break-even point.
True or False?
Total costs can be zero if a business produces nothing.
False.
Total costs cannot be zero — all firms have some fixed costs to pay even at zero output.
Define the break-even point.
The break-even point is the level of output at which total revenue equals total costs — the business makes neither a profit nor a loss.
Define contribution per unit.
Contribution per unit = selling price − variable cost per unit — the amount each unit contributes towards fixed costs.
What is the formula for the break-even point?
Break-even point = fixed costs ÷ contribution per unit.
Selling price is £95 and variable cost is £19. What is the contribution per unit?
£95 − £19 = £76.
Fixed costs are £55,000 and contribution is £76. What is the break-even point?
£55,000 ÷ £76 = 723.68 → 724 units (always round up).
Why do you round the break-even output up to the nearest whole number?
Because only whole units can be sold — you can't sell a partial product.
Define the margin of safety.
The margin of safety is the difference between actual output and the break-even output.
Actual output is 240 units and break-even is 105 units. What is the margin of safety?
240 − 105 = 135 units.
What is the formula for total contribution?
Total contribution = revenue − total variable costs.
How do you calculate profit from total contribution?
Profit (loss) = total contribution − total fixed costs.
Total contribution is £331,260 and fixed costs are £281,720. What is the profit?
£331,260 − £281,720 = £49,540 profit.
How does a rise in variable costs affect the break-even point?
Contribution per unit falls, so the break-even point rises (more units must be sold).
How does a rise in the selling price affect the break-even point?
Contribution per unit rises, so the break-even point falls (each sale contributes more).
When variable costs fall, contribution per unit rises and the break-even point .
When variable costs fall, contribution per unit rises and the break-even point falls.
Once the variable cost of a unit is paid, the rest of the selling price towards fixed costs.
Once the variable cost of a unit is paid, the rest of the selling price contributes towards fixed costs.
True or False?
An increase in fixed costs lowers the break-even point.
False.
A rise in fixed costs means more must be covered, so the break-even point rises.
True or False?
At the break-even point, a business makes neither a profit nor a loss.
True.
At the break-even point, total revenue equals total costs, so there is no profit or loss.
What is the formula for gross profit?
Gross profit = sales revenue − cost of sales.
What is the formula for gross profit margin?
Gross profit margin = (gross profit ÷ sales revenue) × 100.
Define a profit margin.
A profit margin measures the proportion of revenue converted into profit — a higher margin is preferable.
A business has gross profit of £2,851,200 on revenue of £4,752,000. What is the gross profit margin?
(£2,851,200 ÷ £4,752,000) × 100 = 60%.
What is the formula for profit from operations?
Profit from operations = gross profit − indirect costs.
What is the formula for operating profit margin?
Operating profit margin = (profit from operations ÷ sales revenue) × 100.
Operating profit is £1,867,200 on revenue of £4,752,000. What is the operating profit margin?
(£1,867,200 ÷ £4,752,000) × 100 = 39.29%.
What is the formula for profit for the year?
Profit for the year = profit from operations − (net interest + tax).
What is the formula for net profit margin?
Net profit margin = (profit for the year ÷ sales revenue) × 100.
A rising gross profit margin indicates higher sales revenue and/or a falling cost of .
A rising gross profit margin indicates higher sales revenue and/or a falling cost of sales.
What does a change in the operating profit margin indicate?
How well managers are keeping indirect costs low or encouraging sales.
If the gross margin drops but the operating margin is steady, where is the problem?
Direct costs or pricing — the issue is at the gross-profit level.
If the operating margin narrows while the gross margin is fine, what is happening?
Overheads are growing too fast (indirect costs are rising).
If the net profit margin falls while the operating margin is stable, costs or tax changes may be to blame.
If the net profit margin falls while the operating margin is stable, financing costs or tax changes may be to blame.
True or False?
Profit for the year is calculated before deducting tax and interest.
False.
Profit for the year = profit from operations − (net interest + tax) — these ARE deducted.
True or False?
Higher net profit margins make dividends for shareholders more likely.
True.
Higher net profit margins leave more profit available, making dividends more likely.
How can a business use a falling gross profit margin?
As a trigger to negotiate better raw-material prices or switch suppliers.
A higher and increasing profit margin is preferable, as more revenue is converted into .
A higher and increasing profit margin is preferable, as more revenue is converted into profit.
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