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Business > 5. Decision making to improve financial performance > Flashcards

5. Decision making to improve financial performance Flashcards

1
Q

what are budgets

A

a financial plan for the future anticipating the revenues, costs and profit of a business

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2
Q

two types of variance

A

favourable - better than expected

adverse - worse than expected

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3
Q

what is a cash flow forecast

A

a budget for the cash flowing into and out of a business over a period of time

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4
Q

formula for closing balance

A

net cash flow + opening balance

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5
Q

formula for net cash flow

A

inflows - outflows

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6
Q

value of cash flow forecasts 5

A
  • highlights when a business will be short of cash and by how much
  • allows a business to take action (overdraft or loan)
  • can see if payments can be delayed
  • avoids running out of cash and liquidation
  • can manage extra cash (invest or expand)
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7
Q

3 key cash flow problems

A
  • customers paying late
  • holding too much stock
  • seasonal demand
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8
Q

gross profit

A

sales revenue - cost of sales

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9
Q

operating profit

A

sales revenue - cost of sales - operating expenses

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10
Q

profit for the year

A

operating profit + profit from other activities - net finance costs - tax

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11
Q

contribution per unit

A

selling price - variable costs per unit

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12
Q

total contribution

A

contribution per unit x units produced or sold
OR
total revenue - total variable costs

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13
Q

break-even output

A

fixed costs / contribution per unit

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14
Q

margin of safety

A

actual level of output - breakeven level of output

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15
Q

gross profit margin %

A

gross profit / sales revenue x 100

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16
Q

payables (creditors) days

A

payables / cost of sales x 365

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17
Q

receivables (debtors) days

A

receivables / sales revenue x 365

18
Q

profit (m)

A

margin of safety x contribution per unit

19
Q

profit (tc)

A

total contribution - fixed costs

20
Q

3 advantages of retained profit

A
  • Cheapest source of finance (no interest)
  • Doesn’t not need to be repaid
  • No loss of control
21
Q

1 con of retained profit

A

Shareholders may want to receive the money (dividend) & refuse to leave the profit in the business

22
Q

2 pros of overdraft

A
  • flexible way of borrowing money

- useful for business with unpredictable cash inflows

23
Q

5 cons of overdraft

A
  • Interest charged can be high (higher than bank loan): likely to be an expensive way of borrowing money
  • No set interest rate
  • The bank can cancel this facility at any time
  • Difficult to calculate the real cost of borrowing as interest is charged daily on the amount borrowed
  • Mustn’t go over the limit!
24
Q

3 pros of bank loan

A
  • The cost of borrowing money is clear & fixed: it is the interest charged
  • Easy to set a budget as repayment dates & amounts are set in the loan contract
  • No loss of control or interference in the running of the business
25
Q

4 cons of bank loan

A
  • The full amount borrowed plus interest must be repaid
  • Repayments must be done on time whether the business has enough cash or not
  • If repayments are not made the bank can take the business to court (risk of liquidation)
  • A collateral (asset with a value worth the same as the loan e.g. house) may be needed to secure the loan
26
Q

4 pros of debt factoring

A
  • Cash is received upfront (% of invoice value)
  • Possible solution to a cash flow problem due to late payers
  • Relieves the business from having to chase customers for late payment of invoice
  • Can provide credit checks on customers
27
Q

2 cons of debt factoring

A
  • The Debt recovering or Factoring business will charge a fee (cost of recovering the money)
  • Customers may not want to deal with a Factoring business & this may damage the business’ relationship with its customers
28
Q

4 pros of venture capital

A
  • No interest charged
  • No set repayment date(s)
  • Venture capitalists can provide advice, experience or useful contacts
  • Venture capitalists are usually willing to take risks (a bank will not!). This may be the only option available to risky businesses.
29
Q

4 cons of venture capital

A
  • Loss of control of the business: venture capitalists will ask for shares in the business in return for their investment
  • Venture capitalists may interfere in the running of the business
  • The profit will be shared with the venture capitalists
  • Venture capitalists may want their money back & force the sale of the business
30
Q

3 pros of share capital

A
  • Large amounts of capital can be raised (millions!)
  • No interest charged
  • No set repayment date(s)
31
Q

6 cons of share capital

A
  • Loss of control of the business: shareholders will have shares & own part of the business
  • The profit will be shared among the shareholders
  • Financial performance & key decisions must be communicated to shareholders & the public
  • Shareholders have voting rights for key decisions (AGM)
  • Being listed on the Stock Exchange is costly & time consuming
  • For Plcs only
32
Q

what is retained profit

A

Profit retained (not distributed to shareholders) in the business from previous years

33
Q

what is bank overdraft

A

Facility or agreement with a bank to take out more money from an account than a business has in it but only up to an agreed limit

34
Q

what is bank loan

A

Set amount of money borrowed from a bank with fixed interest & set repayment dates (the money must be repaid at specific dates)

35
Q

what is debt factoring

A

Using the services of a Debt Recovering or Factoring business to collect invoice payments from customers

36
Q

what is venture capital

A

Finance obtained from the sale of shares to wealthy individuals also called venture capitalists, Business Angels or Private investors.
Wealthy individuals can ‘team up’ & pull their capital together to form a venture capital firm to lend larger amounts.

37
Q

what is share capital or shar issue

A

Finance obtained the sale of shares via the Stock Exchange

38
Q

9 ways of improving cash flow

A
  • make a cash flow forecast
  • chase late payers and incentivise customers to pay early
  • check customers’ credit rating
  • negotiate longer trade credit with suppliers
  • negotiate monthly repayments to spread out the outflows or rent
  • don’t over stock
  • don’t take on too many orders
  • set up an overdraft
  • use debt factoring
39
Q

5 ways of improving profit - increase sales

A
  • increase promotions
  • reduce price (if -1 PED)
  • use a product life extension strat
  • find new markets or segments
  • launch a new product
40
Q

4 ways to improve profit - lower fixed costs

A
  • find cheaper premises
  • reduce staff number
  • replace staff by machines
  • increase capacity utilisation
41
Q

2 ways of improving profit - lower variable costs

A
  • find cheaper suppliers

- find ways of achieving purchasing economies of scale (bulk buying)

Business (14 decks)

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