3.5 - Financial Managment Flashcards
What is the equation for gross profit?
sales revenue - cost of goods sold
What is the equation for operating profit?
gross profit - operating expenses
What is the equation for net profit?
Operating profit - interest
Net Profit vs. Net Cash Flow
Timing differences
- business may not receive cash straight away, delayed payments
The way fixed assets are accounted for
What are the benefits of serving financial objectives?
- focus for decision making
- provide a yardstick for success or failure to be measured against
- Shareholders assess whether investment is worthwhile
- Outside organisations may be able to judge financial viability if a business
What are some examples of financial objectives?
- ROCE
- cash flow targets
- profit and shareholder returns
- cost minimisation
What are some cash flow objectives?
-Reduce bank borrowings
-Minimise the time taken by customers who pay on credit
-Extend the period taken to pay suppliers
-Minimise Interest Rates
-Reduce the affect of seasonal swings
What is the formula for return on investment?
(net profit/ amount invested) x100
What is the equation for capital gearing?
(loan capital/total capital employed) x100
What are some external influences on a business?
- Market factors
- Actions of other businesses
- PESTLE analysis
What are some internal influences on a business?
- Overall corporate objectives
- Operational factors
- Resources available
What are the three types of budgets?
Expenditure, revenue, profit
What is variance?
difference between actual figures and budgeted figures
What is favourable variance?
When costs are lower than expected or revenue is higher than expected
What is adverse variance?
When costs are higher than expected or revenue is lower than expected
What are cash flow forecasts?
State the inflows and outflows of cash that the managers of a business expect over some future period
What is the opening balance?
the amount carried forward from the previous month (previous month’s closing balance)
What is the closing balance?
sum of net cash flow and opening balance
What is the importance of budgeting?
- Planning
- Assessing performance
- Motivation
What is a break-even chart?
A graphic presentation of the break-even analysis that shows when total revenue and total cost intersect to identify profit or loss for a given quantity sold.
x axis - output
y axis - costs and revenue
What is the formula for contribution per unit?
selling price per unit - variable cost per unit
What is the formula for breakeven output?
Fixed costs / contribution per unit
What is the formula for margin of safety?
Actual level of output - Breakeven level of output
What is the formula for gross profit margin?
Gross profit / revenue x 100
What is the formula for operating profit margin?
Operating profit / sales revenue x 100
What is the formula for net profit margin?
Net profit / sales revenue x100
What are payables?
short-term liabilities owed to suppliers for purchases made on credit
What are receivables?
amounts due from individuals and companies that are expected to be collected in cash
What are some internal sources of finance?
Personal funds, retained profit, sale of assets
What are some external sources of finance?
loans
overdraft
venture capital
crowdfunding
debt factoring
What are overdrafts?
allow a business to spend in excess of the amount in its bank account, up to a predetermined limit. They are the most flexible form of borrowing in the short term.
What is debt factoring?
A financial service whereby a factor (such as a bank) collects debts on behalf of other businesses, in return for a fee. Useful when finance is required quickly
What is trade credit?
the practice of buying goods and services now and paying for them later
What is equity?
The amount an owner(s) would receive if their ownership interests in a business (stock) were sold. (The money the owner has left over)
What is borrowing?
Obtaining money, goods, or services in exchange for promise of future payment
What are some methods of improving cash flow?
- speed up inflows
- slow down outflows
- debt factoring
- short-term borrowing
