5.1/5.2/5.3/5.4 Finance Flashcards
Why is a positive cash flow important?
Receipts need to exceed payments so the business has enough money to pay its bills
Allows a business to survive
Main financial objectives?
Cash Profit Revenue Costs Investment
Gross Profit?
Revenue - Variable Costs
Operating profit?
Gross profit - Fixed costs
Net profit?
Operating profit - remaining costs
How do you calculate return of investment?
operating profit / capital invested x 100
What are budgets?
Financial plans that forecast revenue from sales and expected costs over a period of time
Types of budget?
Revenue Budget
Expenditure Budget
Profit Budget
What research may budgets require?
- Analysing the market to predict trends in price/sales can predict revenue
- Researching costs (labour etc)
- Estimating government plans (wage rises)
What sources can businesses use for budgets?
- Previous trading records
- Market research
- Suppliers
- Government agencies
Difficulties in budgeting?
- Difficult to accurately forecast sales
- Risk of unexpected change
- Decisions by government
Advantages of budgeting?
- Control finance effectively
- Managers can make informed decisions
- Ensure businesses don’t overspend
- Allocate finances
- Motivate staff
- Revenue budget used as a target
Disadvantages of budgeting?
- Employees may need training if delegated responsibility
- Errors or delays as employees adjust to positions
- Allocating budgets can be very difficult
- May not be long term
Reasons for cash flow?
- Support loan applications
- Avoid unexpected cash issues
What are payables?
Amount of time taken by a business to pay back its suppliers (or other creditors)
What are receivables?
The amount of time debtors take to pay back for supplies
Breakeven advantages?
- Forecast effect of varying numbers of customers on profits
- Implications on price/cost on profit
- Simple (good for businesses with one product)
- Quick
- Used to gain more finance (planning)
Breakeven disadvantages?
- Prediction (not accurate)
- Too simple, businesses don’t normally stick to one price
- Difficult if businesses sell more than one product
- Doesn’t account for EOS
What is profit margin?
Compares a business’ profit to sales revenue (%)
What are sources of finance?
The way in which a business raises the finance that is needs for its activities
Internal sources of finance?
- Retained profit
- Sale of assets
External sources of finance?
- Overdraft
- Debt factoring
- Bank loans
- Mortgages
- Debentures
- Venture capital
- Share/equity capital
- Crowdfunding
Why would businesses be more likely to use external sources of finance?
- Large sum is required
- Level of risk is low
- Profit levels are low
What influences what source of finance is used?
- Business’ legal structure
- Cost (rate of interest, cost of selling shares)
- Flexibility
- Control
- Purpose of the finance
What causes cash flow problems?
- Overtrading
- Allowing too much trade credit
- Poor credit control
- Inaccurate cash flow forecasting
What causes variances?
- One of occurrence
- Seasonal variations
- Trend
- Self correcting
How can cash flow be improved?
- Improved control of working capital
- Offer less trade credit
- Arrange short term borrowing
- Negociate improved terms for trade credit
- Debt factoring
- Sale and leaseback
How could profits be improved?
- Reduce costs of production
- Increase prices
- Improve the business’ efficiency
- Capacity utilisation
- Reduce number of substandard products
- Improve methods of production
- Eliminating unprofitable aspects of production
Difficulties in improving cash flow and profit?
- Hard to identify the problem
- Hard to research the cause of the problem
- Coping with the issue (brand image)
- Decision making
