3.3 Processes of financial management Flashcards
Why is planning in financial management is important and what need to be plan and aware of?
- Planning ensure the business cash inflow is greater than cash out flow
- Need to work out financial need for business
- Budgets for expected cost in the future
- Make clear record system (cashflow & income statements, balance sheets)
- Avoid and plan for internal and external finnancial risks
- Use finnancial control to make daily changes
What is debt finance and 2 advantages and disadvantages in planning?
- Borrow money from financial sources
- Adv: +Easily available to acquire
+ Not decrease ownership of business - Disadv : + Debt can be expensive due to interests
+ Repayments begin immediately after borrowing.
What is equity finance and 2 advantages and disadvantages in planning?
- Money from investor or retained profit
-Adv : +Does not have interest charge
+ Does not add to business debt level - Disadv: + Ownership is diluted
+ Profit is share among shareholders
What is the meaning of matching term and source of finance to business purpose?
- Use short term finance for short term needs and long term finance for long term needs.
What are 3 financial report of business and what it does?
- Cash flow statement (Show cash flow in and out of business)
- Income statement (Show profit from sale)
- Balance sheet (Show balance )
What is equation for cash flow statement?
Opening balance + Inflow - outflow = closing balance (OB + I + O = CB)
What is equation for Gross Profit?
GP = Sales - Cost of Good sold (Sales - COGS = GP)
*
What is equation for
COGS ?
COGS = Opening stock +Purchase - Closing stock (COGS = OS + P - CS)
What is equation for Net profit?
Net profit = Gross profit - Expenses (NP = GP - E)
What is equation for balance sheet?
Current Asset + Non current asset = Current liabilities + Non current liabilities + Owner equity (CA + NCA = CL + NCL + OE)
What do ratio in balance sheet use to measure and what is it?
- Measure liquidity and growing
- Current ratio and gearing (High gearing = high debt), debt to equity ratio
What do ratio in the income statement measure and what ratio is it?
- Measure business’s profitability and efficiency
- Gross Profit Ratio , Net Profit Ratio, Return on Owner ‘s Equity, Expense ratio, Account receivable turn over ratio (How long take for account receivable to pay the cash)
What is equation for debt to equity ratio?
{ (CL + NCL) / OE } x 100%
What is current ratio equation?
CA / CL
What is Gross profit ratio ?
GP/R x 100
What is Net profit ratio?
NP/R x 100
What is return on owner equity ratio?
NP / OE x100
What is expense ratio?
(Expenses / Sales ) x 100
What is Account receivable turnover ratio and how to change to days
Sales / Account Receivable
- To find days use 365 divide by the ratio found for ARTR
Comparative ratio?
Use ratio of business to compare to standards bench marking or other competitors to identify position of business
What are some limitations of financial reports and what it is?
- Normalise earning: earning is adjusted base on economic upsizing or downsizing, might be inaccurate and not reliable
- Capitalise expense: Payment include with a non current asset
- Valuing assets: Some asset lose value over time, intangible assets like goodwill are added to show good cash flow and increase asset
- Timing issues
- Debt payment
- Notes to the financial statement:provider deeper understanding of reports to investors and lenders
How can financial report be ethical ?
Financial managers should:
- Value assets accurately
- Normalise business earning
- Avoid capitalising expenses
- State exactly business debt repayments
- Write accurate notes to the financial statements
