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3.5 Financial Management Flashcards

1
Q

What is a financial objective ?

A

Refers to the monetary goals/targets a business will set itself during a certain period of time

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2
Q

Value of setting financial objectives ?

A
  • act as a measure of performance
  • provide targets that can motivate
  • potential investors/creditors may be able to assess the viability of the business
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3
Q

Define cost minimisation

A

The process by which businesses attempt to maximise profits by keeping costs low

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4
Q

Define revenue targets

A

Involves setting minimum levels of revenue

Any objective set would have to be co-ordinated with other functional areas

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5
Q

Define profit targets

A

Involves setting a satisfactory level of profit that the company would be happy achieving

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6
Q

Define return on investment

A

A business might set itself an objective in terms of the return on an investment

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7
Q

Calculation for return on investment ?

A

Return on investment (profit) / capital invested x 100

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8
Q

Define capital structure

A

Refers to the long term finance of the business made up of equity (share capital) and borrowing (loan capital)

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9
Q

Internal influences on capital structure ?

A
  • owners + their motive
  • industry sector + current financial position of the business
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10
Q

External influences on capital structure ?

A
  • economic factors
  • political/government policy
  • competition
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11
Q

Why do businesses need finance ?

A
  • start up funds
  • running costs
  • growth and expansion
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12
Q

Internal sources of finance ?

A
  • owners saving
  • retained profit
  • reducing levels of stock
  • sale of existing assets
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13
Q

External sources of finance
(Short term) ?

A
  • overdraft
  • trade credit
  • debt factoring
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14
Q

External sources of finance
(Long term)?

A
  • share capital
  • government grants
  • loans
  • crowdfunding
  • venture capitalist
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15
Q

Define overdraft

A

Service that lets you have money even if there is none available in your current account

For an agreed amount of money and an agreed period of time

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16
Q

Define trade credit

A

Where a business will allow customers a period of time to pay for their goods or services.

Buy now pay later

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17
Q

Define debt factoring

A

Where a business sells outstanding customer debts to a 3rd party company who chase + collect payments.

The business gets a one off payment upfront.

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18
Q

Define bank loan

A

A loan for an agreed period of time at a fixed rate of interest to be repaid in monthly instalments

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19
Q

Define venture capitalist

A

Business invests in new start-up companies

in return they get some ownership of the company

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20
Q

Define equity

A

Also known as share capital

This is raised when a business sells shares in return for a % of the business. The business will need to pay dividends to shareholders

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21
Q

Define crowdfunding

A

An entrepreneur or business can attract a ‘crowd’ of investors - each of whom takes a small stake by contributing towards an online fundraising target

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22
Q

Advantage & disadvantage:
Bank loan

A

Adv:
- can spread large amounts over smaller more manageable payments

Disadv:
- interest
- often a number of T&C’s
- fees for late repayments

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23
Q

Advantage & disadvantage:
Overdraft

A

Adv:
- flexible
- no interest if paid on time

Disadv:
- high charges if you miss payment deadlines

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24
Q

Advantage & disadvantage:
Venture capitalist

A

Adv:
- large amounts
- no debt repayments

Disadv:
- can lose control of ownership
- dividends

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25
Advantage & disadvantage: Share capital
Adv: - large amounts - no debt repayments Disadv: - can lose control of ownership - dividends
26
Advantage & disadvantage: Trade credit
Adv: - flexible - no interest if paid on time Disadv: - high cost if not paid on time - fees attached
27
Advantage & disadvantage: debt factoring
adv: - large amounts upfront - all the money can be accessed straight away disadvantage: - could potentially have a negative image on the business if 3rd party is not ethical in collecting debt
28
Advantage & disadvantage: crowdfunding
adv: - no debt repayments - good PR for the business disadvantage: - can lose some equity depending on terms of deal - might be limited
29
Advantage & disadvantage: government grants
adv: - does not need to be repaid - no interest or repayment disadvantage: - limited availability
30
what factors will influence the choice of finance?
- time; short term/long term - finance available in the business - what the money is needed for
31
define a budget
a forward financial plan that covers all the aspects of a businesses costs and revenues
32
why prepare a budget?
- to exercise financial control - can provide direction & co-ordination - to ensure that no department has an overspend
33
what are variances? (budget)
the variance is the difference between actual and the budget
34
define a favourable variance
better than expected: - costs lower than expected - revenue higher than expected
35
define an adverse variance
worse than expected: - costs higher than expected - revenue lower than expected
36
budget allocation: what does the level of expenditure depend on?
- amount available - inflation - external factors
37
define zero budgeting
where budget costs + revenues are set to zero budget is based on new proposals for cost and sales time consuming but starting from scratch = ensure that funds are allocated in the right way
38
define historical budgeting
use last years figures and add a little for inflation quicker + simpler but may not focus on problem areas of the business -----> doesn't encourage efficiency
39
benefits of budgeting?
- effective way to control + monitor costs - can be used as a motivational tool - inefficiency and waste can be identified
40
drawbacks of budgeting?
- budgets = based on assumptions and are not an exact tool - time consuming - can be demoralising if set incorrectly
41
define cash flow
the movement of money in and out of a business over a period of time
42
define cash flow forecast
the projection of money moving in and out of the business over a given period of time
43
what can poor cash flow lead to?
- unable to pay bills - poor reputation - lack of future financial options
44
how to improve a cash flow?
- use a source of finance - sale and leaseback - cut costs
45
how to work out net cash flow?
inflows - outflows
46
purpose of cash flow?
identify problems in advance
47
define break even
the point at which total revenue equals total costs
48
what does break even analysis help with?
helps a business to make decisions about prices, costs and the level of sales
49
define total revenue
(sales) amount of money business receives from selling its goods
50
total revenue equation?
price per product x quantity sold
51
define fixed costs
costs that do not change as output changes
52
define variable costs
costs that change as output changes e.g material costs
53
how to work out total costs?
fixed costs + variable costs
54
define margin of safety
the difference between the current output and the break even point
55
how to work out margin of safety?
current output - break even
56
break even formula?
fixed costs / selling price per unit - variable cost per unit
57
total contribution formula?
(selling price - variable cost) x output
58
profit/loss calculation?
total contribution - fixed costs
59
why can cash flow problems occur?
- poor management - high costs - over-trading
60
how can we improve a cash flow?
- use a source of finance - debt factoring - sale and leaseback
61
define sale and leaseback
when a business sells one of its assets and will then rent it back provides a short term boost to the cash flow but can have a negative impact on profitability
62
difference between revenue and profits?
revenue is the money made from sales whereas profits is calculated by deducting costs + expenses from revenue
63
define profitability
profitability is a measure against revenue can be effective in making comparisons over time
64
how can a business improve profitability?
- cut material costs - source cheaper suppliers - reduce overheads
65
potential issues of improving cashflow?
- debt repayments - lower long term profits - credit rating issues
66
potential issues of improving profitability?
- quality issues - de-motivated workers
67
Define a balance sheet
A financial document that summarises the net worth of a business It balances total assets with total equity and liabilities
68
Define a debtor
Someone who owes the business money e.g a customer
69
What are trade receivables ?
Amounts owed by debtors to the business (Money coming into the business)
70
What is a creditor?
Someone the business owes money to e.g supplier
71
Define trade payables
The amount a business owes to its creditors
72
Define inventories
Stocks
73
What is total equity ?
The total amount of money pumped into a business either from retained profit or share capital
74
Define non-current assets
Fixed assets e.g premises and vehicles which are likely to be kept for at least a year
75
Define current assets
Expected to vary in value on a daily basis e.g stock or cash
76
What are current liabilities ?
Payments that need paying within a year e.g creditors
77
What are net current liabilities ?
Current assets minus current liabilities
78
Define non-current liabilities
Debts that will take more than 1 year to pay e.g long term bank loans
79
Define depreciation
Accounting technique which allows a business to show a true reflection of an assets value

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