3.5.2 Analysing financial performance

Question 1

Disadantages of break even

Answer 1

• Unrealistic assumptions – products are not sold at the same price at different levels of output; fixed costs do vary when output changes
• Most businesses sell more than one product
• A planning aid rather than a decision-making tool

Question 2

advantages of break even

Answer 2

• Focuses on what output is required before a business reaches profitability
• Helps management & finance-providers better understand the viability and risk of a business or business idea

-quick and easy calculations

Question 3

margin of safety is

Answer 3

The margin of safety is the difference between actual output and the breakeven output

Question 4

assumptions using break even

Answer 4

• Selling price per unit stays the same, regardless of the amount produced
• Variable costs vary in direct proportion to output – i.e. variable cost per unit is the same
• All output is sold
• Fixed costs do not vary with output – they stay the same

Question 5

Contribution per unit formula

Answer 5

Contribution per unit = selling price per unit less variable costs per unit

Question 6

budgeting is

Answer 6

A financial plan for the future concerning the revenues and costs of a business

Question 7

problems with budgeting

Answer 7

your…
-Costs
Always likely to be unexpected costs
Changes in external environment will impact costs (e.g. taxes, exchange rates)

-Setting unrealistic targets adds to de-motivation

Question 8

problems with cash flow forecasting

Answer 8

Sales prove lower than expected
Easy to be over-optimistic about sales potential
Market research may have gaps
Customers do not pay up on time
A notorious problem for businesses, particularly small ones
Costs prove higher than expected
Perhaps because purchase prices turn out higher
Maybe also because the business is inefficient
Imprudent cost assumptions

Question 9

causes of cash flow issues

Answer 9

Low profits or (worse) losses
Too much production capacity
Excess inventories held
Allowing customers too much credit & too long to pay
Overtrading – growing the business too fast
Unexpected changes in the business
Seasonal demand

Question 10

impacts of financial objectives

Answer 10

-The nature of business ownership has a significant impact on financial objectives. A venture capital investor would have quite a different approach to a long-standing family ownership.

Question 11

external financial objectives

Answer 11

• economic state

- competitors>e.g cost minimisation crucial if competitors r growing market shares bc theyre more efficient