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a level business > 3.5 Finance > Flashcards

3.5 Finance Flashcards

1
Q

why are financial objectives often the most important in a business

A

because without sufficient financial security the business will cease to trade
financial objectives such as profit maximisation are also the incentive for which many businesses are run

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2
Q

importance of financial objectives

A

poor financial management is a key reason why a business might fail
financial objectives are easier to manage than other functional pbjectives often with a numerical element and timescale
financial measures determine the success of all other functional areas such as marketing operations and human resources
financial measures such as profitability and shareholder value are two key reasons why people invest in businesses
the level of long term debt in a business increases risk
a business may set objectives to reduce the proportion of long term funding that is debt

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3
Q

what is cash balance

A

cash inflows - cash outflows

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4
Q

what is profit

A

revenues earned - expenses incurred

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5
Q

profit hierarchy

A

revenue
gross profit
operation profit
profit of the year

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6
Q

how do u get to gross profit from revenue

A

direct costs such as materials are taken away from revenue

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7
Q

how do u get operation profit from gross profit

A

indirect costs such as salaries and overheads are taken away from profit

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8
Q

how do u get profit of the year from operation profit

A

other incomes such as interest are taken into account and taxation to be applied to the business profit also called net profit

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9
Q

costs

A

lowering costs may be important where a business is trying to improve efficiency
cost is also an important factor in a recession or where a business competes on price

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10
Q

profit

A

profit objectives are clear to understand and one of the key performance indicators of a business
profits are often shared with all stakeholders and as such are the indicator that most businesses will be judged against
eve though the business may be performing well, shareholders and the public may judge a business as underperforming if profits have fallen

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11
Q

revenue

A

this is earnings generated by a business from its trading activity
setting revenue objectives helps drive a businesses ambition to grow
increased revenue indicates the popularity of a particular product
also suitable where profit is less important eg a charity

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12
Q

cash flow objectuves

A

a business will fail if it cant meet its financial obligations and pay bills which is why some businesses will set specific objectives to help manage cash flow
businesses with long cash cycles will find it more challenging to manage cash flow

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13
Q

specific cash flow objectives

A

maintaining a specific level of cash reserves
extending payment periods to suppliers
shortening payment periods from customers

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14
Q

return on investment

A

a business may set a target for capital investment over thee year
this will support a strategy of growth
similarly a business may set an objective to reduce capital over the year in order to reduce debt
investment objectives may also refer to the returns recieved on the investment
this may be calculated as the operating profit as a percentage of investment

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15
Q

return on investment formula

A

operating profit divided by capital invested x 100

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16
Q

what is capital structure

A

the balance between capital from borrowing (loan capital) and the capital from selling shares (share capital) in the company
some businesses will want to balance these two sources ( low and high gearing)

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17
Q

low gearing

A

danger of losing control of the business
high dividend payments to shareholders

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18
Q

high gearing

A

may be at risk of increasing interest payments
difficult to find further lending

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19
Q

financial objectives

A

corporate objectives
nature of the product
other functions
the competative environment
economic environment
technological

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20
Q

corporate objectives

A

all functional objectives will flow from these

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21
Q

nature of the product

A

a product with a short life cycle may dictate that sales revenue is an important financial objective to set

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22
Q

other functions

A

if the business sets operational objectives to improve efficiency, financial objectives around reducing costs may be appropriate

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23
Q

the competitive environment

A

businesses will naturally set objectives that will allow them to compete
eg aggressive investment targets

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24
Q

economic environment

A

a business may set lower profit objectives if indicators suggest the market is shrinking

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25
technological
new technology may determine how a business invests it may also create opportunities to cut costs and increase revenues
26
what is a budget
a financial plan for the future an effective budget should drive many of the decisions taken across the functional areas of a business eg the number of products to make, how to promote the product and the number of workers to employ budgets can also be used to motivate the workforce when used in target setting
27
types of budgets
setting budgets helps a business achieve its financial and wider objectives a business looking to grow will increase its revenue budgets this will inform the expenditure budgets which will determine the business's budgeted profits
28
the budgeting process
analyse the market such as trends and average prices set financial objectives set revenue objectives forecast expenditure such as labour costs set expenditure budgets set profit budgets review and monitor budgets- adjusting as appropriate
29
what will managers rely on when setting budgets
market research past sales trends and internal forecasts such as quotes from suppliers
30
problems with budgets
a budget is only accurate as the data on which it is based past trends can be a poor indicator of what is likely to happen in the future therefore it can be very difficult to forecast sales new decisions taken by governments and public bodies- such as interest rate changed (interest to be paid on business loans might increase) and employment legislation (leading to more costs for employers) unexpected changes such as a rise in comodity prices an unrealistic budget loses all value as a motivational tool
31
variance analysis
compares the forecast data to the actual figures can be used to analyse the accuracy of the budgeting process and help make decisions about budget adjustments a favourable variance is one that is better than budgeted and an adverse variance is one that is worse
32
key questions when analysing budgets
which adverse variances are due to unexpected factors how effectively has the business budgeted revenue what are the key areas that have led to the budget being innaccurate how effectively has the business budgeted expenditure which adverse variances are due to poor forecasting
33
cash flow forecast
a cash flow forecast will predict the cash inflows (reciepts) for a business and the cash outflows (expenditure) a cash flow forecast should determine the cash funds a business has at any one time if a business knows what cash funds it needs it can take measures to ensure finance is available
34
what are the three sections a cash flow forecast is made up of
cash in cash out net cash flow
35
net cash flow
difference between monthly inflows and monthly outflows
36
closing balance
net cash flow + opening balance closing balance is the available cash a business is forecast to have during that trading period
37
opening balance
cash carried foreward from previous trading period for example Februarys opening balance will be Januarys closing balance
38
cash flow calculation
(inflows- outflows= net cash flow) + opening balance = closing balance
39
what questions should managers consider when analysing cash flow forecasts
are monthly inflows greater than monthly outflows what are the forecast periods of high expenditure is a posotive cash flow sustainable are inflows increasing over time is there a seasonal trend do we have enough cash reserves to cover unexpected costs
40
why should business construct a cash flow forecast
used to support an application for lending (perhaps as part of a business plan) supports the budgeting process identifies any potential cash flow crisis
41
what must a business analyse the timings of in order to manage cash flow effectively
payables recievables
42
payables
amount of time (days) taken for the business to pay creditors
43
recievables
amount of time taken for debtors to pay the business
44
what is the break even output
the point at which a business's revenue generated through the sales of its products will cover the total costs
45
the uses of break even analysis
decide whether a business idea is profitable and viable identify the level of output and sales necessary to generate a profit (and therefore the scale of the business) assess changes in the level of production assess the effects of costing and pricing decisions
46
break even output formula
contribution per unit divided by fixed costs
47
contribution
the difference between the variable costs of one unit and its selling price
48
total contribution formula
total output x contribution per unit
49
what are the three lines shown on a break even graph
total revenue total costs fixed costs
50
what can analysing and manipulating break even charts help a business to do
make decisions on whether to accept prices on orders different from those normally charged or the impact on profitability of a change in costs and output levels
51
what is the margin of safety
the difference between the breakeven point and the current level of output the size of the margin of safety will determine the risk of the business- the margin of safety should be as high as possible
52
margin of safety formula
current level of output - break even output
53
benefits of break even analysis
can be used to analyse the impact of varying customers, prices and costs on a businesses profit it is simple and easy to use the break even point is a useful guideline to help businesses make decisions
54
limitations of break even analysis
break even analysis simplifies what can be a very complex process- most business sell multiple products which makes break even more difficult costs are rarely constant- break even analysis presumes that costs stay the same over various levels of output break even focuses on output- it pressumes that the business will sell all of its output at the same price
55
what do we need to compare profit to for it to be useful
compare to level of sales and level of investment required to generate that profit
56
gross profit margin
a useful indicator to analyse how a business has performed in terms of its direct trading activity it helps a business answer the queston 'have our products been successful' however gross profit doesnt take into account inidrect costs
57
gross profit margin calculation
gross profit divided by sales revenue x100
58
operating profit
takes into account the performance of a business more fully as the calculation takes into account direct and indirect costs useful when working alongside the gross profit margin
59
operating profit margin calculation
operating profit divided by sales revenue x100
60
profit of the year margin
ratio takes into account all revenues and costs incurred by the business a good measure of how effectively the business performed over the financial year may be used to identify the potential to pay a dividend to shareholders
61
profit for the year margin
profit for the year divided by sales revenue x100
62
how can financial data be used to make business decisions
break even analysis can be used to answer 'what if' scenarios profitability ratios can be used to analyse which aspects of a business are being run effectively and where improvements are needed
63
why is financial information very important in business decision making
because all business decisions must be financially viable however managers must also take into account the issues behind the numbers eg financial informatio wont take into account human or ethical factors
64
retained profit (long term)
net profit reinvested back into the business instead of being returned to the ornwers
65
internal sources of finance
retained profit sale of assets owners capital
66
advantages of retained profit
a free source of finance that doesnt incur interest
67
disadvantages of retained profit
shareholders may wish to recieve back in the form of a dividend
68
sale of assets (long term)
selling off items of value to free up capital
69
advantages of sale of assets
frees up value in unwanted assets to be invested in other areas of the business
70
disadvantages of sale of assets
the business loses the benefit of the asset such as no longer owning a delivery vehicle
71
owners capital (long term)
personal savings used to start or expand a business
72
advantage of owners capital
a free source of finance gthat does not incur interest
73
disadvantage of owners capital
owners could lose their personal investment
74
overdraft (short term)
where a bank allows a firm to take out more money than in its bank account
75
advantages of overdrafts
flexible way to fund working capital- acts as a buffer for day to day expenses
76
disadvantages of overdrafts
bank may ask for repayment at any time and interest rates are high
77
debt factoring (short term)
where a firm sells on its debt to a third party factor
78
advantages of debt factoring
allows a business to recieve cash immediately
79
disadvantages of debt factoring
customers could be aware if debts are factored and lose faith in the company
80
bank loans (long term)
borrowing from a bank
81
advantages of bank loans
can be negotiated to meet busines requirements
82
disadvantages of bank loans
business has to pay interest and may have to offer collateral to secure it
83
mortgage and debentures (long term)
mortgage is a special type of loan made for purchasing property a debenture is a loan made to a business secured against its assets
84
advantage of mortgages and debentures
ideal for long term investments
85
disadvantages of mortgages and debentures
large amounts of interest can be charged over its lifetime
86
venture capital (long term)
capital invested at an early stage ('seed funding') by an individual or company in return for equity in the business
87
advantage of venture capital
can bring expertise into the business
88
disadvantage of venture capital
owner may not want input from elsewhere into the running of the business
89
share capital (long term)
an owners investment into a limited company to become a shareholder
90
advantage of share capital
can access very large amounts of capital and interest
91
disadvantage of share capital
only available to Ltd (people you know) and Plc (public)
92
crowdfunding
raising monetary contributions from a large number of people, today often performed via crowdfunding websites (LT)
93
advantages of crowdfunding
cheap and easy to set up
94
disadvantages of crowdfunding
not suitable for raising amounts of money
95
improving cash flow
the key to managing cash flow is to speed up the process of cash coming into the business (recievables) and slow down the process of money leaving the business (payables)
96
speed up inflows
incentives early repayment- gives customers a discount for paying early reduce trade credit given to customers sell off stock at a discounted price to free up cash inject fresh capital into the business
97
slow down outflows
delay payments to suppliers increase trade credit agreements with suppliers cut costs- find cheaper alternatives or postpone spending in areas such as training and advertising
98
causes of cash flow problems
overtrading allowing too much trade credit to customers unforeseen costs poor credit control innaccurate cash flow management
99
what is the best way to ensure a business has a posotive cash flow
to invest time and effort in researching and planning effective cash flow forecasts
100
how can profitability be improved
through measures taken by each functional area of the business
101
ways to increase revenue
increase price reduce process (dependent on price elasticity of demand) create awareness and desire through marketing add value to the product- increase benefits and features
102
why are businesses unprofitable
no demand for the product selling at the wrong price low contribution per unit poor management of costs expansion of the business-profit retained and not available for return to shareholders
103
improving profit
profit is the difference between total revenue and total ncosts therefore there are two general ways that a business can improve its profits increase revenue/ decrease costs
104
ways to reduce costs
reduce production costs improve efficiency use capacity more fully eliminate unprofitable processes-such as unprofitable product lines reduce variable costs- negotiate better deals with suppliers lower overheads- move to a cheaper location
105
problems with managing finance
impact on stakeholders spend money to make money short term solutions
106
impact on stakeholders
some actions can damage relationships with stakeholders eg delayed payment could upset suppliers and high prices could deter customers
107
spend money to make money
measures to improve profits and cash flow often costs the business eg an advertising campaign to boost sales or lower prices to incentive early payment from customers
108
short term solutions
sometimes efforts may boost profits and improve cash flow in the short term but hinder long term sucess eg lowering reinvestment to return profits for shareholders
109

a level business (10 decks)

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