Theme 2

• Break-even output is the number of units a business needs to make and sell so that sales revenue is equal to total cost.
• Factors affecting a sales forecast include the economic climate, interest and exchange rates, competitor actions or external shocks.
• A sales forecast may be limiting as the information is based on past trends and the quality of the information may vary. It can also only provide a prediction for a limited time period.
• A business can reduce its fixed costs by moving to a cheaper premises, finding a new supplier or reducing its workforce.
• Break-even analysis is not completely reliable as the business is not guaranteed to sell everything they produce, and the selling price may vary between different locations or distribution channels.
• A budget is used to prevent overspending and to provide a means for comparison for managers to use to judge performance.
• A variance arises when there is a difference between the actual and budgeted figures.
• Budget variances can be caused by changes in demand, market conditions and poor predictions.
• Historical budgeting is when the business uses previous figures as a basis for the budget. It is more realistic as it is based on real results but does not encourage cost efficiency within the business.
• Zero budgeting is when a new budget is made from scratch based on new proposals for sales and costs. It can make the process more time-consuming and complicated but potentially more realistic.
• Cost of sales is the manufacturing cost of a product (variable costs).
• Using profit margins allows the business to easily identify trends in profitability and to compare their profitability with businesses of different sizes.
• A high quality profit can be repeated or sustained whereas a low quality profit is difficult to repeat and often an exceptional circumstance.
• A statement of financial position is a summary of what the business owns and owes on a specific date at a specific moment in time. It is a snapshot of the business' finances.
• An asset is what a business owns whereas a liability is what a business owes.
• For something to be 'current' it will not be present in the business within 12 months, whereas for something to be 'non-current' it will still be in the business in 12 months time.
• Trade receivables include the money owed by customers to the business who have been given trade credit.
• Trade payables include the money the business owes to suppliers.
• Working capital is another name for net current assets ( current assets - current liabilities).
• Liquidity is how easily and quickly a business can meet its debts by turning assets into cash.
• Reserves and retained earnings records what has already been used towards purchasing assets in the statement of financial position.
• The current ratio is a measure of the amount of current assets in comparison to the amount of current liabilities of a business.
• Having a low current ratio indicates liquidity issues whereas a higher ratio may indicate there is too much working capital tied up in inventories or debtors.
• When assessing their current ratio, businesses should consider the industry they operate in and compare it to previous figures.
• The acid test ratio is used to understand how the business may cope in an emergency surrounding repayments.
• Gearing is the amount invested in the business that has been borrowed as loans or overdrafts.
• Gearing can be reduced by focusing on profit improvement or repaying long-term loans.
• Job production is where one single product is made in its entirety before the worker starts another. Often the product is made by one worker to specific customer requirements using limited or no automation.
• Batch production is where products of particular variations are made in batches. In this method, machinery is often used along with division of labour.
• Division of labour is when workers have specific tasks in a production process they repeat rather than being involved in multiple stages of the project.
• Flow production involves mass produced and identical products being continuously made. This often uses high levels of automation and most workers in the process will only supervise a particular stage.
• Job production often provides consumers with high quality and can meet specific customer needs. However, the process is very labour intensive and requires a high level of skill, so there is a high cost per unit.
• Batch production helps the business provide greater choice for the consumer and making products in groups can reduce the unit cost compared to job production. However it can lead to lots of unfinished products being held which can cause liquidity issues.
• Flow production allows businesses to exploit economies of scale and is capital intensive making the process very efficient. However there is little flexibility and it needs a large initial investment in machinery.
• Cell production splits the flow process into self-contained units where a worker completes a significant part of the product. Workers will often be skilled at a number of roles and so can rotate jobs.
• Capacity utilisation is a measure of the extent to which the productive capacity of a business is being used.
• Having a good level of capacity utilisation makes the business more efficient by spreading cost over a larger number of units.
• A high capacity utilisation may lead to rushed production and less quality assurance. It could lead to a less flexible and less motivated workforce.
• Buffer stock involves a business having a minimum level of stock so it never runs out of raw materials.
• Just in time (JIT) stock control involves the business holding as little stock as possible.