Business AS revision summaries Borja
Jimenez
FINANCIAL PLANNING (2)
UNIT 2
Contents
FINANCIAL PLANNING (2)....................................................................................... 1
FIXED COSTS................................................................................................... 2
VARIABLE COSTS............................................................................................. 2
TOTAL COSTS.................................................................................................. 2
BREAK-EVEN (31)................................................................................................ 3
SALES FORECASTING (30)...................................................................................4
CASH FLOW (32)................................................................................................. 6
IMPROVING CASH FLOW..................................................................................7
BUDGETS (33)..................................................................................................... 7
VARIANCE ANALYSIS........................................................................................ 8
SALES VOLUME1
This is the number of units sold by a business. Depending on the nature of the
business, sales volume is measured in different ways.
Sales volume: Sales
revenue/price
Ways of improving sales volume:
Advertising and promotion: businesses will tend to sell more output if they
increase expenditure on advertising. Businesses must carefully monitor
the impact on profit of increased expenditure. Heavy expenditure on
promotion and advertising may have a negative impact on profit even
though sales volume rises
Improved targeting: businesses are likely to increase sales volumes if their
advertising and promotion is more targeted. This means that it should be
aimed more accurately at the people who are most likely to purchase the
product.
Extend product range: this can help to satisfy a larger number of
customer’s needs and wants and so help to increase sales volume; it
provides more choice for the customer.
Extend distribution networks: if businesses are successful in one method
of distribution, they might consider others to boost sales volume. It
increases accessibility for customers. In some cases, this enables
businesses to sell to global markets
Develop relationships with customers: by engaging more with customers
businesses might be able to improve customer retention, improve
customer loyalty and encourage repeated sales. In effort to achieve this,
businesses try to develop relationships with customers.
SALES REVENUE
This is the value of output sold by a business. It may be calculated over a
specific period of time.
Sales revenue= price x
quantity
1
Quantity of products sold in a specified period of time
1
, Business AS revision summaries Borja
Jimenez
Ways of improving sales revenue:
Price change: both a price increase and decrease might boost sales
revenue. It depends on whether the demand for a product is elastic or
inelastic
o Raise in price: a business can increase revenue by raising price if
demand is price inelastic2
o Decrease in price: a business can only increase revenue with a
price cut if demand is price elastic 3
Adding complementary services or products: a business can generate
more sales revenue if they can persuade customers to buy additional
services or products that are related to the core product.
BUSINESS COSTS
Businesses need to gather accurate and reliable information about their costs to
make decisions. It is important to understand how the costs of a business change
in both the short and the long run
Short run: the period of time when at least one factor of production is
fixed
Long run: all factors can vary; period of time where all the factors of
production are variable
FIXED COSTS
These are costs that do not vary with the level of
output or sales. These costs remain the same whether
a business produce nothing or if it is at full capacity –
they are the same at all levels of production.
In the long-term costs may rise due to inflation in the
short term these have to be paid even if there is no
output
VARIABLE COSTS
Costs that vary depending on your level of output or
sales. If the firm does not produce anything, variable
costs will be zero.
These costs change with the amount of goods being
TOTAL VARIABLE COSTS (TVC) = variable cost
per unit x output
produced.
TOTAL COSTS
This is the addition of both fixed and variable costs of a business. This is the
entire cost of producing a given level of output. As output increases, total costs
will rise.
TOTAL COSTS (TC) = Fixed costs (FC) +
TOTAL AVERAGE COSTS (TC) =
Variable costs (VC)
total cost of production / quantity of
TOTAL COSTS (TC) = direct costs + indirect units produced
costs
2
A change in price causes a smaller percentage change in demand
TOTAL PROFIT= total revenue –
3 TOTAL
A COSTS
change (TC)
in price = Cost
causes per unit
a bigger x quantity
change in demandtotal costs
produced
2
Jimenez
FINANCIAL PLANNING (2)
UNIT 2
Contents
FINANCIAL PLANNING (2)....................................................................................... 1
FIXED COSTS................................................................................................... 2
VARIABLE COSTS............................................................................................. 2
TOTAL COSTS.................................................................................................. 2
BREAK-EVEN (31)................................................................................................ 3
SALES FORECASTING (30)...................................................................................4
CASH FLOW (32)................................................................................................. 6
IMPROVING CASH FLOW..................................................................................7
BUDGETS (33)..................................................................................................... 7
VARIANCE ANALYSIS........................................................................................ 8
SALES VOLUME1
This is the number of units sold by a business. Depending on the nature of the
business, sales volume is measured in different ways.
Sales volume: Sales
revenue/price
Ways of improving sales volume:
Advertising and promotion: businesses will tend to sell more output if they
increase expenditure on advertising. Businesses must carefully monitor
the impact on profit of increased expenditure. Heavy expenditure on
promotion and advertising may have a negative impact on profit even
though sales volume rises
Improved targeting: businesses are likely to increase sales volumes if their
advertising and promotion is more targeted. This means that it should be
aimed more accurately at the people who are most likely to purchase the
product.
Extend product range: this can help to satisfy a larger number of
customer’s needs and wants and so help to increase sales volume; it
provides more choice for the customer.
Extend distribution networks: if businesses are successful in one method
of distribution, they might consider others to boost sales volume. It
increases accessibility for customers. In some cases, this enables
businesses to sell to global markets
Develop relationships with customers: by engaging more with customers
businesses might be able to improve customer retention, improve
customer loyalty and encourage repeated sales. In effort to achieve this,
businesses try to develop relationships with customers.
SALES REVENUE
This is the value of output sold by a business. It may be calculated over a
specific period of time.
Sales revenue= price x
quantity
1
Quantity of products sold in a specified period of time
1
, Business AS revision summaries Borja
Jimenez
Ways of improving sales revenue:
Price change: both a price increase and decrease might boost sales
revenue. It depends on whether the demand for a product is elastic or
inelastic
o Raise in price: a business can increase revenue by raising price if
demand is price inelastic2
o Decrease in price: a business can only increase revenue with a
price cut if demand is price elastic 3
Adding complementary services or products: a business can generate
more sales revenue if they can persuade customers to buy additional
services or products that are related to the core product.
BUSINESS COSTS
Businesses need to gather accurate and reliable information about their costs to
make decisions. It is important to understand how the costs of a business change
in both the short and the long run
Short run: the period of time when at least one factor of production is
fixed
Long run: all factors can vary; period of time where all the factors of
production are variable
FIXED COSTS
These are costs that do not vary with the level of
output or sales. These costs remain the same whether
a business produce nothing or if it is at full capacity –
they are the same at all levels of production.
In the long-term costs may rise due to inflation in the
short term these have to be paid even if there is no
output
VARIABLE COSTS
Costs that vary depending on your level of output or
sales. If the firm does not produce anything, variable
costs will be zero.
These costs change with the amount of goods being
TOTAL VARIABLE COSTS (TVC) = variable cost
per unit x output
produced.
TOTAL COSTS
This is the addition of both fixed and variable costs of a business. This is the
entire cost of producing a given level of output. As output increases, total costs
will rise.
TOTAL COSTS (TC) = Fixed costs (FC) +
TOTAL AVERAGE COSTS (TC) =
Variable costs (VC)
total cost of production / quantity of
TOTAL COSTS (TC) = direct costs + indirect units produced
costs
2
A change in price causes a smaller percentage change in demand
TOTAL PROFIT= total revenue –
3 TOTAL
A COSTS
change (TC)
in price = Cost
causes per unit
a bigger x quantity
change in demandtotal costs
produced
2
