WJEC Eduqas Comp 2

Break-even output

Fixed Costs ÷ Contribution per Unit

Contribution per unit

Selling Price - Variable Cost per Unit

Margin of safety

Actual Sales - Break-even Sales

Advantages of break-even analysis

Simple to calculate, helps with planning and financial forecasting

Disadvantages of break-even analysis

Assumes all units sold, ignores changes in costs, oversimplified view of real business

Income budget

Planned revenue over a specific period

Expenditure budget

Planned costs over a specific period

Profit budget

Expected profit over a specific period based on income and expenditure budgets

Variance analysis

The process of comparing actual outcomes with budgeted figures

Adverse variance

When actual costs are higher or revenue is lower than budgeted

Favourable variance

When actual costs are lower or revenue is higher than budgeted

Cash flow forecast

A prediction of cash inflows and outflows over a future period

Importance of cash flow forecasting

Helps businesses ensure liquidity and plan for cash shortages

Causes of cash flow problems

Late payments, poor credit control, overtrading, seasonal demand

Solutions to cash flow problems

Reducing costs, speeding up inflows, delaying outflows, arranging overdrafts

Purpose of budgeting

Provides financial control, sets targets, motivates staff

Advantages of budgeting

Improves financial management, identifies potential shortfalls early

Disadvantages of budgeting

Inflexible if circumstances change, can demotivate if unrealistic

Break-even chart

A graphical representation of costs and revenues to show the break-even point

Fixed costs

Costs that do not change with the level of output

Variable costs

Costs that vary directly with the level of output

Total costs

The sum of fixed and variable costs

Selling price

The price charged to customers for a product

Importance of break-even analysis

Helps businesses understand how many units must be sold to cover costs

Impact of increased fixed costs on break-even

Break-even output increases

Impact of reduced variable costs on break-even

Break-even output decreases

Impact of higher selling price on break-even

Break-even output decreases

Impact of lower selling price on break-even

Break-even output increases

Cash inflows

Money received by a business, e.g., sales revenue

Cash outflows

Money paid out by a business, e.g., wages, suppliers

Net cash flow

Cash inflows minus cash outflows

Opening balance

The amount of cash available at the start of a period

Closing balance

The amount of cash available at the end of a period

Debt factoring

Selling debts to a third party to receive cash immediately

Overdraft

Short-term borrowing facility allowing a business to spend more than it has in its account

Financial statements

Reports that summarize the financial performance and position of a business

Purpose of income statement

Shows business performance by calculating profit or loss over a period

Revenue in income statement

Total income from sales

Cost of sales in income statement

Direct costs of producing goods sold

Gross profit formula

Revenue - Cost of Sales

Operating profit formula

Gross Profit - Operating Expenses

Profit for the year

Operating profit adjusted for other revenues, costs, taxes

Statement of financial position

A summary of a business's assets, liabilities, and equity at a point in time

Assets

Resources owned by the business

Liabilities

Debts owed by the business

Current assets

Short-term assets like cash, inventory, receivables

Non-current assets

Long-term assets like machinery, land, buildings

Current liabilities

Short-term debts due within a year

Non-current liabilities

Long-term debts due after one year

Equity

Owner's interest in the business after liabilities are deducted

Decision trees

A diagram that shows possible outcomes and their probabilities to aid decision-making

Advantages of decision trees

Visual structure for complex decisions, includes risks and rewards

Disadvantages of decision trees

Probabilities are often estimates, outcomes may be uncertain

Expected value in decision trees

The weighted average of possible outcomes based on their probabilities

Critical path analysis

A planning technique to identify the longest sequence of dependent tasks and minimum project duration

Weighted average

Weighted average of possible outcomes based on their probabilities

Advantages of critical path analysis

Helps plan time and resources effectively, identifies task dependencies

Disadvantages of critical path analysis

Time estimates may be inaccurate, doesn't account for all risks

Float time

The amount of time a task can be delayed without delaying the overall project

SWOT analysis

Identifying strengths, weaknesses, opportunities, and threats to aid strategic decision-making

Strengths (SWOT)

Internal capabilities that give the business an advantage

Weaknesses (SWOT)

Internal limitations that put the business at a disadvantage

Opportunities (SWOT)

External chances for business growth or improvement

Threats (SWOT)

External challenges that could negatively impact the business

Supply chain management

Managing the flow of goods, information, and finances from supplier to customer

Importance of supply chain management

Improves efficiency, customer satisfaction, and profitability

Inventory control

Managing stock levels to balance costs with service levels

Lead time

The time between placing an order and receiving delivery

Buffer stock

Minimum stock kept to prevent production stoppages

Just-in-Time (JIT) production

A system where materials arrive just as needed to minimize inventory costs

Advantages of JIT production

Reduces storage costs, improves cash flow

Disadvantages of JIT production

High reliance on suppliers, vulnerable to delays

Lean production

Minimizing waste while maintaining or improving output quality

Kaizen

Continuous small improvements in business processes

Total Quality Management (TQM)

A system of management committed to continuous improvement and customer satisfaction

Corporate Social Responsibility (CSR)

A business's duty to consider the social and environmental impacts of its activities

Advantages of CSR

Enhances brand image, builds customer loyalty

Disadvantages of CSR

Can increase costs, not all consumers prioritize ethics

Ethical business behaviour

Acting in a morally right way beyond legal requirements

Impact of ethics on decision-making

May limit aggressive profit strategies, promotes long-term sustainability

Mission statement

A statement outlining a business's purpose and core values

Vision statement

A statement outlining what a business aims to achieve in the future

Business objectives

Specific, measurable goals a business aims to achieve

Strategic objectives

Long-term goals aligned with a company's mission and vision

Tactical objectives

Short-term, specific actions supporting strategic objectives

Corporate aims

Broad long-term intentions of a business

Organic growth

Growth from expanding the business's own operations rather than mergers/acquisitions

External growth

Growth through mergers, takeovers, or alliances

Mergers

Two businesses join together to form one

Takeovers

One business acquires control over another

Advantages of organic growth

Lower risk, retains company culture

Disadvantages of organic growth

Slower than external growth

Advantages of mergers and takeovers

Quick expansion, economies of scale

Disadvantages of mergers and takeovers

Culture clashes, expensive, possible redundancies

Economies of scale

Cost advantages gained when a business increases output

Internal economies of scale

Cost savings within the business, like technical or managerial economies

External economies of scale

Cost savings from external factors, like industry growth

Diseconomies of scale

Rising costs due to business becoming too large

Profit margins

Measure of profitability (profit as a percentage of revenue)

Gross profit margin

(Gross profit ÷ Revenue) × 100