3.5 Finance Flashcards
What are the Financial objectives?
Profit, Cash-Flow, Cost Minimalisation, Capital Structure, Revenue Target, Return on investment, Dividends
What is Gearing?
The percentage of capital tied up in the business that is taken from long term borrowing.
Ways of managing Gearing?
Focus on profit, Repay long term loans, Retained profits rather then dividends, issue more share and convert loans into equity.
What Is The Formula For Capital Employed?
LTL + Share Capital + Reserves
Ways of Increasing Gearing?
Focus on Growth, Convert short term debt into long term loans, Buy-back ordinary share and pay increased dividends
What Is The Return On Capital (ROC) Formula
Operating Profit / Capital Employed X 100
What are possible Cash flow objectives?
Reduce borrowing to target level, Minimise interest rates, Reduce average debtor days to target, Reduce seasonal swings in cash flow, Net cash flow as a percentage of net profit.
What does ROI stand for and what is it?
Return on investment- The amount of profit you are getting off asset.
What are the External influences on financial objectives?
Political, Economic, Social, Technological, Environmental, Legal
What is overtrading?
When a business expands too quickly without having the financial resources to support it. If sustainable source of income isn’t found then it can cause a business failure.
Why set Budget?
Set targets and priorities, Allocate resources, Improve efficiency, monitor performance, Control income and Expenditure.
What is budget variance?
When there is a difference between actual and forecast budget
How can a business set its budget?
Historical (based on previous year) or zero budget (research all predicted figures from scratch)
What types of variance are there?
Profit variance, Revenue variance, Expenditure variance
What is the disdavantage of historical budgeting?
Can’t be used for a new business and it might carry over inaccuracies from the previous year if market or business conditions have changed
What is adverse variance?
When the difference between forecast and actual budget has a negative impact on the budget
How Do You Work Out Closing Balance?
Net Cashflow + Opening Balance
What is the opposite of adverse variance?
Favourable variance
Give 2 sources of short time finance
Overdraft and Debt factoring
Give 4 sources of long term finance
Selling shares, Retained profits, loans
What is the disadvantage of using an overdraft?
High interest rates.
How does debt factoring work?
Sell a businesses debts to a debt factor and the debt factor takes a percentage of the sum.
What is the advantage of using venture capital?
Aside from the financial backing, obtaining venture capital financing can provide a start-up or young business with a valuable source of guidance and consultation.
What is venture capital?
Investment made by specialist funds to finance the launch, early development or expansion of a private company.
