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A-level Business > 5 - Decision making to improve financial performance 💰 > Flashcards

5 - Decision making to improve financial performance 💰 Flashcards

1
Q

Define financial objectives

A

the monetary targets a business wants to achieve within a period of time

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2
Q

What can a financial objective include?

A
  • profit
  • costs
  • cash flow
  • revenue
  • return on investment
  • capital structure
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3
Q

Define return

A

how much money the business gets back

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4
Q

Define investment

A

how much capital isbeing used

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5
Q

Define ROI %

A

a measure of a business’ profitability and performance

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6
Q

What are some likely ROI targets?

A
  • benchmark to industry standard
  • internal benchmarking
  • external factors eg. interest rates
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7
Q

How do you calculate ROI

A

operating profit / capital invested X100

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8
Q

Define long-term funding

A

the amount of capital invested in a business that will stay in the business for over a year

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9
Q

What 2 sources does long term funding come from?

A
  • equity
  • debt
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10
Q

What is the formula for gearing?

A

debt / total long term funding X 100

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11
Q

Define cash

A

physical existence of money within the business

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12
Q

Define cash flow

A

timings of cash flowing into and out of the business

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13
Q

What makes cash and profit different?

A
  • credit sales
  • bad debts
  • heavy stock holding
  • investment in fixed assets
  • seasonality
  • repayments of loans
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14
Q

What can an income statement also be known as?

A

profit and loss accoun

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15
Q

How do you calculate the gross profit?

A

sales revenue - cost of sales

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16
Q

How do you calculate operating profit?

A

Gross profit - expenses (FC)

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17
Q

How do you calculate profit for the year?

A

Operating profit - interest and taxation

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18
Q

In an income statement, what are the rows going down?

A

Sales revenue
Cost of sales (VC)
Gross profit
Expenses (FC)
Operating profit
Interest and taxation
Profit for the year

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19
Q

Internal influences on financial objectives

A
  • Business ownership
  • Size and status of business
  • Corporate culture
  • Budgets
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19
Q

External influences on financial objectives

A
  • Economy
  • Competitors
  • Social and political change
  • Legislation
  • Market changes`
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20
Q

Define budgets

A

forecasts or plans for the future finance of a business

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21
Q

What can budgets be?

A

income
expenditure
profits

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22
Q

Problems in setting budgets

A
  • dependent on predictions
  • costs are subjective to change
  • actions of competitors are unknown
  • managers may lack expertise
  • may be subject to bias
  • takes time and effort = opportunity cost
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23
Q

What are the steps of setting a budget?

A
  1. Set clear objectives
  2. Carry out market research
  3. Produce a sales forecast
  4. Set income budget
  5. Set expenditure budget
  6. Set profit budget
  7. Set divisions target
  8. Review against objective
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24
Q

What is the difference between the budget and the actual called?

A

variance

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25
Q

A positive variance is called…

A

favourable

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26
Q

A negative variance is called…

A

adverse

27
Q

What happens to income, expenditure and profit if variance is adverse?

A

Income goes down
Expenditure goes up
Profit goes down

28
Q

What happens to income, expenditure and profit if variance is favourable?

A

Income goes up
Expenditure goes down
Profit goes up

29
Q

Define the break-even point

A

the point where TR = TC and the business is not making a profit/loss

30
Q

Formula for break-even point

A

fixed costs / contribution per unit

31
Q

Formula for contribution per unit

A

selling price - variable costs per unit

32
Q

How do you calculate the margin of safety

A

actual output level - break even level of output

33
Q

Pros to break even

A
  • provides a target
  • aids decision making
  • helps to secure finance
  • predicts outcome of changing variables
  • calculates profit/loss
  • calculates minimum number of sales
34
Q

Cons to break even

A
  • based on predictions
  • even FC can vary in reality
  • ignores changes in FC
  • only indicates the number of sales needed, doesn’t ensure sales are true
35
Q

List examples of cash inflows

A
  • cash sales
  • payment from debtors
  • sales of assets
  • bank loan
  • owner’s investment
36
Q

List examples of cash outflows

A
  • purchasing stock
  • wages/salaries
  • paying debt = loans/creditors
  • purchasing assets
37
Q

What is a credit sale?

A

When it takes time before the business gets it

38
Q

What is a cash sale?

A

The business gets the money immediately

39
Q

Formula for net cash flow

A

Inflows - outflows

40
Q

Formula for closing balance

A

Net cash flow + opening balance

41
Q

What are debtors?

A

Someone who owes a business money

42
Q

What are creditors?

A

someone the business owes money to

43
Q

What does an insufficient liquid cash flow mean?

A

An inability to meet short-term debts

44
Q

When might a business miss opportunities?

A

When they have limited cash

45
Q

What should a business consider when they encounter cash flow problems?

A

Whether the cash flow problem is short term or long term

46
Q

Direct causes of cash flow problems:

A
  • credit sales
  • overtrading (additional overheads)
  • internal management (poor planning/stock control)
  • seasonality
  • unexpected events
47
Q

How can a business improve their cash flow?

A
  • increasing volume of inflows
  • speeding up timings of inflows
  • reducing the volume of outflows
  • slowing down timings of outflows
48
Q

Sources of Finance

List the external sources of finance X10

A
  • debt factoring
  • overdraft
  • share capital
  • loans
  • venture capital
  • crowd funding
  • trade credit
  • mortgage
  • grants
  • lease/hire purchase
49
Q

Sources of Finance

List the internal sources of finance X3

A
  • retained profits
  • sale of assets
  • personal savings
50
Q

Sources of Finance

What is debt factoring?

A

When a business sells its accounts to a 3rd party at a discount, enabling companies to immediately unlock cash tied up in unpaid invoices without having to wait the usual payment terms

51
Q

Sources of Finance

What are the short-term sources? X7

A
  • debt factoring
  • overdraft
  • trade credit
  • sale of assets
  • personal savings
  • grants
  • lease/hire purchase
52
Q

Sources of Finance

What are the long-term sources? X6

A
  • retained profits
  • share capital
  • loans
  • venture capital
  • crowd funding
  • mortgage
53
Q

Sources of Finance

Pros and cons to debt factoring

A

✅ Receives debt asap
Addresses cash flow issues
Debt chased by experts
Time saving
❌ Reduces profitability as have to pay fee
May damage rep if seen having poor finances

54
Q

Sources of Finance

Pros and cons to overdraft

A

✅ Timely payments
Flexible
Helps time mismatch flow of finance
❌ High interest
Risk of seizing
Owe money

55
Q

Sources of Finance

Pros and cons to retained profits

A

✅ No interest
No debt
❌ must have good cash flow to save

56
Q

Sources of Finance

Pros and cons to share capital

A

✅ No interest
Large finance raised
Only need to pay dividends not fixed
❌ Loss of ownership
Potential loss of control
Complex system

57
Q

Sources of Finance

Pros and cons to loans

A

✅ Lower interest rate than overdraft
Greater certainty
❌ Requires security
Interest
Harder to arrange

58
Q

Sources of Finance

Pros and cons to venture capitalists

A

✅ Exposure
Expertise and advice
Opportunity to grow
Doesn’t need to be repaid
❌ Loss of control
Pressure to grow fast
Mismatched interests

59
Q

Sources of Finance

Pros and cons to crowd funding

A

✅ Brand loyalty
Exposure
You’re in control
❌ Risk of public failure
Don’t get any money if target isn’t raised

60
Q

Sources of Finance

Pros and cons to trade credit

A

✅ No interest
More future cash
❌ Still has to be paid back within a time period

61
Q

Sources of Finance

Pros and cons of sale of assets

A

✅ Can raise considerable sums
Improve profitability if no longer used
❌ May receive low value if product sold fast
Reduced ability to make a profit

62
Q

Sources of Finance

Pros and cons of mortgages

A

✅ Greater certainty of funding
Lower interest rate than others
❌ Requires security (collateral)
Hard to arrange
Interest

63
Q

Sources of Finance

Pros and cons to personal savings

A

✅ No interest
Owner keeps control
Opportunity cost is low
❌ Lack of savings
Nothing to fall back on
Risk

64
Q

Sources of Finance

Pros and cons to grants

A

✅ Free money
Targeted at businesses
May come with free publicity
❌ Very specific eligibility
Time consuming to get
Competitive and May have strings attached

65
Q

Sources of Finance

Pros and cons to lease

A

✅ Convenience in pay
Helpful for smaller businesses
Encourages savings
❌ Risk
Financial debt
If unable to pay, can’t keep goods

A-level Business (10 decks)

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