3.3.1 Planing and Implementing Flashcards
The planning cycle is ongoing and includes:
The planning cycle is ongoing and include:
- Determining financial needs
- developing budgets
- maintaining record systems
- minimising financial risks
- planning financial controls
Explain the role of addressing financial needs in financial management
A situational analysis of the current financial position is the basis for effective financial planning. Data-driven identification of current financial issues and trends will assist the development of appropriate budgets, analyses, strategies and controls in the planning cycle. This analysis can be obtained from documents such as the income statement, cash flow statements and balance.
What will acknowledging the financial position do?
Acknowledging the financial position will allow the development of accurate forecasts of sales and expenses associated with marketing, employment relations and operations.
What does a business plan set out?
The business plan sets out the goals and future direction (vision) of the business, including where the business expects to be at the end of a particular time period.
Outline the financial elements of a business plan
The financial elements of the plan will identify the amount of finance needed, the sources of finance available and the methods of reporting financial data to support the strategies developed to achieve the visions, goals and objectives of the business plan.
What is a budget and what do they identify?
A budget is a plan predicting revenue (from sales and investments) and expenses of a business for a future time period. Budgets identify anticipated sources of revenue and expenses and are derived from the overall strategic business plan.
What types of budgets are there?
Operating budgets and financial budgets.
What is are operating budgets?
The operating budget, which relates to the day-to-day operation of the business and includes sales, labour costs and Administratie expenses
What are financial budgets?
Financial budgets, which include the balance sheet, cash flow and income (profit and loss)
Why are budgets offten adjusted?
Budgets are often adjusted because of the changing business environment.
What are record systems?
Record systems are the processes and practices that a business uses to store data such as sales, expenses, assets, liabilities and customer-supplier product information.
What does an effective record system do for a business?
An effective record system makes it possible for a business to improve efficiency, continuously monitor its performance, produce financial reports, comply with taxation requirements, identify issues of concern and opportunity, and respond faster to these changes.
Define financial risk
Financial risk is the chance that a financial decision will result in a financial loss
What is the main type of financial risk?
The main type of financial risk is that the business will not have enough cash flow to meet its financial commitments.
Why do businesses take risks with regard to financing?
Businesses take risks in order to achieve the financial objectives of liquidity, profit, efficiency, growth and return on capital. It is recognised in business that the greater the risk taken the larger the possible financial return.
What are strategies that reduce financial risk?
Strategies that reduce the level of risk include credit controls, hedging, derivatives, insurance, diversification and careful management of working capital and long term loan liabilities
What are financial controls and what do they include?
A Financial control is a tool that provides feedback on the financial performance of the business. Financial controls include budgets, cash flow statements, income (revenue) statements and balance sheets.
What are Ratio and comparative analysis used for?
Ratio and comparative analysis is used to assess the actual performance of the business against industry benchmarks and planned performance.
What are some advantages of debt financing?
- Ownership and control of the business is retained by the business
- Interest repayments are tax-deductible
- Loan funds are often easier and quicker to obtain than equity funds
- Loans provide a business with the opportunity to grow
- Profits are not shared with the lender of the loan
What are some cost disadvantages of debt financing?
- There are initial establishment costs and ongoing fees and charges.
- Interest has to be paid on the funds borrowed by the business
- Interest rates can vary over the life of the loan, making the loan more expensive than originally planned
- Repayments are often fixed and inflexible
- Amount must be repaid in a set period of time
What are some risk disadvantages of debt financing?
- Intrest rates may increase, thus increasing the cost of the loan and repayments
- Cash flow difficulties may develop, causing the business to have difficulty repaying (servicing) the loan and this can lead to defaulting on the loan
- If it is a secured loan, defaulting on the loan may lead to loss of the asset
- The debt to equity ratio (gearing/ leverage) may increase, affecting the solvency and long term stability of the business.
What are some advantages of equity financing?
- The capital does not have to be repaid with interest, within a set time
- Owners receive returns through both dividend repayments and increase in share value
- There is flexibility in timing of dividend payments
- There is greater potential for growth as owners have a vested interest in the success of the business
- The debt to equity (gearing/leverage) ratio decreases, lowering the risk to the business.
What are some Cost disadvantages of Equity financing
- Increase the number of owners, reducing the level of control and increasing the sharing of profit and the time taken to make decisions
- In the longer term, it is more expensive than debt- dividends are paid to shareholders and owners expect higher returns on capital
- Equity is often hard to obtain and can take time to organise and, therefore, may limit growth
- Legal and administrative costs are high
- Equity funding is not tax deductable
What are some risk disadvantages of equity financing?
- Central control of ownership is reduced, causing a loss of control in decision making.
- High demand for dividend payments to shareholders may reduce the level of retained profits.
- The business is more open to takeovers if another business buys a majority (51%) shareholding in the business
