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Business Studies > 3.5 Finance > Flashcards

3.5 Finance Flashcards

1
Q

What is a financial objective?

A

A goal or target pursued by the finance department within an organisation

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2
Q

What are the 4 financial objectives?

A

Revenue,costs, profits
Cash flow
Return on investment
Cost minimisation

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3
Q

How would you increase revenue?

A

Growth, expansion, new products, advertising

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4
Q

How would you lower costs?

A

Change suppliers
Shop around
Negotiate
Save/waste less

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5
Q

How to increase profits ?

A

More revenue, lower costs

And in a recession?

Cut costs with machinery (get more effective machinery) or lower prices and add promotion schemes

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6
Q

What is cash flow?

A

The money that flows in and out of the business on a day to day business, it should be enough to pay expected bills in coming months

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7
Q

What is return on investment?

A

The financial return a company makes for investing in a project

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8
Q

How to calculate return on investment?

A

Net profit / capital invested x100

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9
Q

What does return on investment tell us?

A

A measure of the returns made from investing in the business

How good the business is at converting money invested into profit

Provides a means of comparison with other investment opportunities

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10
Q

How can a business reduce costs?

A

Minimise cost of raw materials
Reduce wage cost
Lower waste
Move to lower cost location
Delayering

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11
Q

How does cost minimisation benefit a business?

A

Keep price the same and benefit from a higher profit margin
Use cost reduction to reduce selling price an attract more customers

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12
Q

Why are profits important?

A

Provide a measure of success
Source of capital for business growth
Attract further funds from investors

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13
Q

What’s another word for sales revenue?

A

Sales turnover

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14
Q

What is a profit margin?

A

Profits as a % of its sales revenue

Profit margin = profit/SR x100

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15
Q

Definition of profitability ?

A

A relative measure comparing profits to another variable . Eg. Sales revenue to operating profit margin

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16
Q

What is gross profit and how do u calculate the profit margin for it?

A

Sales revenue - cost of sales
(Cost of sales might also be referred to as direct costs as they’re direct costs used to make/provide for goods and services )

GP/SR x100

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17
Q

How do you improve gross profit margins?

A

Need to increase the gap/ difference between sales revenue and direct costs

Increase SP
Decrease direct costs (VC)
Both

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18
Q

What is operating profit and how do u calculate its profit margin ?

A

Gross profit - fixed overheads

(Gross profit is the figure focused on by city analysts)

OP/SR x100

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19
Q

How to improve profit margins?

A

Fewer staff
Effectiveness of advertising
Reduce wastage
More production abroad
Outsourcing

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20
Q

What is profit for the year and how do u calculate its profit margins?

A

Profit after all other costs have been deducted (finance and tax)

This is the profit business has to retain for reinvestment or to pay out to shareholders as dividends.

OP- finance and tax

PFY/SR x100

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21
Q

What is price elasticity?

A

a measurement of the change in the demand for a product as a result of a change in its price.

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22
Q

What is contribution and what is the formula for it?

A

Amount of money business makes after variable cost of production has been payed

SP-VC per unit

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23
Q

How to calculate total contribution?

A

Contribution X no. Of units sold

Or

SR - total VC

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24
Q

What is the significance of total contribution?

A

If total contribution exceeds fixed costs, then the business is making a profit,

If the fixed costs exceed the contribution then the firm is making a loss

A firm will break even if the total contribution is equal to the FC

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25
Q

What is break even?

A

Level of output at which total sales revenue is equal to the total costs of production

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26
Q

What is break even analysis and what can it be used for?

A

Study of relationship between TC and TR to identify level of output at which business breaks even

A business can also use BE analysis to discover impact of changes in output on its profit levels

27
Q

How do you calculate Break even?

A

FC/ (SP-VC)

Or

FC / Contribution

28
Q

What is margin of safety?

A

Current/ actual sales - Break even level of sales

Amount of which sales can fall before a firm starts making a loss. Higher margin of safety the less likely it is that a loss making situation will develop

29
Q

What is the need for finance? (Give me 3 reasons)

A

Starting Up - buy assets or pay wages or costs of materials/bills

Growth - make enough profit to reinvest into growth, or need funds to grow externally (as it may alr have been paid out to shareholders)

Other situations - cover cash flow problems, fund production of a large order

30
Q

What is the best internal source of finance?

A

Profit

31
Q

What are the two main sources of external finance?

A

Loan capital (overdrafts and loans) and share capital

32
Q

What is a bank loan? (Give me points)

A

Most common way of obtaining finance
Set period of time
Has interest (fixed/variable)
Can be payed short/medium/long term installments

33
Q

Is bank loan an internal or external source of finance?

A

External

34
Q

Is bank loan short or long term source of finance?

A

Long term

35
Q

What is an overdraft as a source of finance (give me some points)

A

Allows a business to be “overdrawn”
Length of time for it is usually negotiated
Usually have higher interests than normal loans
For firms that use overdraft as a way of smoothing cash variations, interest payments can be quite small

36
Q

Is Overdrafts internal or external?

A

External

37
Q

Is overdrafts short term or long term?

A

Short term

38
Q

What is Venture capitalist as a source of finance? (Give me points)

A

Invest in interesting businesses with dynamic prospects
Willing to take a risk on a business
No need to repay
Dividends can be cut : flexibility
Can bring wise heads into boardroom

39
Q

Are Venture capitalist and external or internal source?

A

External

40
Q

Are venture capitalist short term or long term?

A

Can be either

41
Q

What is retained profit?

A

No associated costs
No interest charges
May be too little profit to allow business to grow to its full capability

42
Q

Is retained profit internal or external source of finance?

A

Internal

43
Q

Is retained profit long term or short term?

A

Long term

44
Q

What is share capital as a source of finance?

A

No need to repay
Flexibility in cutting dividends
May be hard to raise
Can dilute ownership
Great for growing/starting up businesses

45
Q

Is share capital and internal or external source of finance?

A

External

46
Q

Is share capital short term or long term source of finance?

A

Short term

47
Q

What is trade credit as a source of finance?

A

Simplest form of external financing
Businesses obtains goods/services from another business but does not pay back immediately
Avg credit period is 2 months
Good way of boosting day to day finance
However other businesses may be hesitant or reluctant to pay with other businesses if they do not get paid in good time

48
Q

Is trade credit internal or external source of finance?

A

External

49
Q

Is trade credit short term or long term?

A

Short term

50
Q

What is Debt factoring?

A

Selling goods on credit - can arrange that it’s bank take over the invoicing, giving seller 80% of the value of the sale immediately, then collecting payment from customer
Bank hands over retaining sum to seller (usually 16%) so seller has most of cash immediately
Received about 96% of sale
Bank only gets 4% for itself

51
Q

Is debt factoring internal or external source of finance?

A

Internal

52
Q

Is debt factoring short term or long term?

A

Short term

53
Q

What is crowdfunding as a source of finance?

A

Looks for many small investors
Invest an avg of £100 (so need £500 to start up)
However more of crowdfunded with a small fund could be an administrative nightmare
Good for locality
Creates PR
Credit score isn’t required
Less risk

54
Q

Is crowdfunding a short term or long term source of finance?

A

Long term

55
Q

Is crowdfunding internal or external?

A

External

56
Q

What is crowdfunding used for?

A

Growth

57
Q

What is debt factoring used for?

A

Just a way of finance for cash flow

58
Q

What is trade credit used for?

A

Stock

59
Q

What is share capital used for?

A

Growth

60
Q

What is retained profit used for?

A

Stock

61
Q

What is a venture capitalist used for?

A

Growth

62
Q

What is an overdraft used for?

A

Expenses

63
Q

What is a bank loan used for?

A

Growth

64
Q

What factors affect break even output?

A

Changes to SP
Changes to VC
Changes to FC

Business Studies (4 decks)

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