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business > 3.5 Financial Management > Flashcards

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
Q

Advantage & disadvantage:
Share capital

A

Adv:
- large amounts
- no debt repayments

Disadv:
- can lose control of ownership
- dividends

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26
Q

Advantage & disadvantage:
Trade credit

A

Adv:
- flexible
- no interest if paid on time

Disadv:
- high cost if not paid on time
- fees attached

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27
Q

Advantage & disadvantage:
debt factoring

A

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
Q

Advantage & disadvantage:
crowdfunding

A

adv:
- no debt repayments
- good PR for the business

disadvantage:
- can lose some equity depending on terms of deal
- might be limited

29
Q

Advantage & disadvantage:
government grants

A

adv:
- does not need to be repaid
- no interest or repayment

disadvantage:
- limited availability

30
Q

what factors will influence the choice of finance?

A
  • time; short term/long term
  • finance available in the business
  • what the money is needed for
31
Q

define a budget

A

a forward financial plan that covers all the aspects of a businesses costs and revenues

32
Q

why prepare a budget?

A
  • to exercise financial control
  • can provide direction & co-ordination
  • to ensure that no department has an overspend
33
Q

what are variances?
(budget)

A

the variance is the difference between actual and the budget

34
Q

define a favourable variance

A

better than expected:
- costs lower than expected
- revenue higher than expected

35
Q

define an adverse variance

A

worse than expected:
- costs higher than expected
- revenue lower than expected

36
Q

budget allocation:
what does the level of expenditure depend on?

A
  • amount available
  • inflation
  • external factors
37
Q

define zero budgeting

A

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
Q

define historical budgeting

A

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
Q

benefits of budgeting?

A
  • effective way to control + monitor costs
  • can be used as a motivational tool
  • inefficiency and waste can be identified
40
Q

drawbacks of budgeting?

A
  • budgets = based on assumptions and are not an exact tool
  • time consuming
  • can be demoralising if set incorrectly
41
Q

define cash flow

A

the movement of money in and out of a business over a period of time

42
Q

define cash flow forecast

A

the projection of money moving in and out of the business over a given period of time

43
Q

what can poor cash flow lead to?

A
  • unable to pay bills
  • poor reputation
  • lack of future financial options
44
Q

how to improve a cash flow?

A
  • use a source of finance
  • sale and leaseback
  • cut costs
45
Q

how to work out net cash flow?

A

inflows - outflows

46
Q

purpose of cash flow?

A

identify problems in advance

47
Q

define break even

A

the point at which total revenue equals total costs

48
Q

what does break even analysis help with?

A

helps a business to make decisions about prices, costs and the level of sales

49
Q

define total revenue

A

(sales)
amount of money business receives from selling its goods

50
Q

total revenue equation?

A

price per product x quantity sold

51
Q

define fixed costs

A

costs that do not change as output changes

52
Q

define variable costs

A

costs that change as output changes e.g material costs

53
Q

how to work out total costs?

A

fixed costs + variable costs

54
Q

define margin of safety

A

the difference between the current output and the break even point

55
Q

how to work out margin of safety?

A

current output - break even

56
Q

break even formula?

A

fixed costs / selling price per unit - variable cost per unit

57
Q

total contribution formula?

A

(selling price - variable cost) x output

58
Q

profit/loss calculation?

A

total contribution - fixed costs

59
Q

why can cash flow problems occur?

A
  • poor management
  • high costs
  • over-trading
60
Q

how can we improve a cash flow?

A
  • use a source of finance
  • debt factoring
  • sale and leaseback
61
Q

define sale and leaseback

A

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
Q

difference between revenue and profits?

A

revenue is the money made from sales whereas profits is calculated by deducting costs + expenses from revenue

63
Q

define profitability

A

profitability is a measure against revenue

can be effective in making comparisons over time

64
Q

how can a business improve profitability?

A
  • cut material costs
  • source cheaper suppliers
  • reduce overheads
65
Q

potential issues of improving cashflow?

A
  • debt repayments
  • lower long term profits
  • credit rating issues
66
Q

potential issues of improving profitability?

A
  • quality issues
  • de-motivated workers

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