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6 Decision making to improve financial performance Flashcards

1
Q

What are the three benefits of setting financial objectives? (6.1 setting financial objectives)

A

As a measure of performance
As targets that cen be a focus for decision making
That potential investors or creditors may be able to asses that viability of the business

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2
Q

What is capitol expenditure?(6.1 setting financial objectives)

A

Money used to purchase, upgrade or improve the life of long-term assests.

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3
Q

Objectives for investment (capitol expenditure levels: capitol expenditure objectives may depend on (3 things and a possible objective)? (6.1 setting financial objectives)

A

The overall corporate objectives
The type of business
The state of the economy and the market the company operates in
Possible objective: return on an investment eg 10% this percentage is calculated using the formula:
return from investment (or profit)
—————————————————— x100
capitol invested
This calculation might also be used when deciding between two different investments.

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4
Q

What is equity?(6.1 setting financial objectives)

A

The money that a business raises through the issue of shares.

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5
Q

What is borrowing? (6.1 setting financial objectives)

A

The money that a business raises through loan capital.

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6
Q

What does capitol structure refer to? (6.1 setting financial objectives)

A

The long-term capital (finance) of a business, made up of equity and borrowing.

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7
Q

Why is the proportion of borrowing to equity important (3 reasons)? (6.1 setting financial objectives)

A

The higher the borrowing, the greater the interest repayment
High interest payments could put a business at risxk if profit should fall
Any rise in interest rates could have a big impact on profit

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8
Q

Targets may be set in terms of what and how is this measured (give the formula)? (6.1 setting financial objectives)

A

The proportion of long-term capitol that is debt.
Measured by the gearing ratio, which is calculated using this formula:
loan capitol
——————— x100
total capitol
where total capitol= loan capitol + equity

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9
Q

Objectives for revenue might depend on what (2 things)? (6.1 setting financial objectives)

A

The type of market a business is operating in
The state of the economy

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10
Q

Objectives for revenue need to be coordinated with other functional areas such as the competitive environment necessities cost and profit objectives: what are the three cost objectives?(6.1 setting financial objectives)

A

Unit costs targets
Specific targets for individual costs
Overall cost minimisation

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11
Q

Objectives for revenue need to be coordinated with other functional areas such as the competitive environment necessities cost and profit objectives: what are the three profit objectives?(6.1 setting financial objectives)

A

A particular figure
A percentage increase
In terms of profit margin

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12
Q

What is gross profit? (6.1 setting financial objectives)

A

The difference between a business’s sales revenue and the direct costs of production

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13
Q

What is operating profit?

A

The difference between the gross profit and the indirect costs of production

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14
Q

How is gross profit calculated?(6.1 setting financial objectives)

A

gross profit= sales revenue - direct costs of production

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15
Q

How is operating profit calculated? (6.1 setting financial objectives)

A

operating profit = sales revenue - all costs of production
or
operating profit = gross profit - expenses

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16
Q

What is profit for the year? (6.1 setting financial objectives)

A

Includes other expenditure, such as:
interest payments
tax to be paid
other income such as:
interest recieved
money recieved from the sale of assests

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17
Q

How do you calculate profit for the year? (6.1 setting financial objectives)

A

Profit for the year = operating profit + other income - other expenditure

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18
Q

What are profit margins?

A

An accounting measure designed to gauge the financial health of a business.
It expresses the profit figure as a % of turnover.

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19
Q

Profit figures are most easily analysed by converting them to ratios or profit margins: how do you work that out? (6.1 setting financial objectives)

A

Gross profit margin = gross profit Profit for the year margin = profit for the year
—————— x 100 ————————– x100
sales revenue sales revenue

Operating profit margin = operating profit
———————— x100
sales revenue

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20
Q

Once profit margins are calculated performance can then be assed by what two things? (6.1 setting financial objectives)

A

Comparing figures to those of previous years
Comparing figures to those of similar businesses

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21
Q

What is cash flow? (6.1 setting financial objectives)

A

The money moving into and out of a business over a given period of time

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22
Q

Cash flow objectives may vary according to circumstances and include what 5 things? (6.1 setting financial objectives)

A

Targets for monthly closing balances
Reduction of bank borrowings to a target level
Reduction of seasonality in sales
Targets for achieving payment from customers
Extention of the business’s credit period to pay suppliers

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23
Q

Cash flow is the difference between what? (6.1 setting financial objectives)

A

The actual amount of money a business recieves (inflows) and the actual amount it pays out (outflows)

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24
Q

Profit is the difference between what? (6.1 setting financial objectives)

A

All sales revenue (even if payment has not yet been recieved) and expenditure.

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25
Q

A profitable business may have cash flow problems due to what 3 reasons? (6.1 setting financial objectives)

A

Holding large amounts of inventory (stock)
Having sales on long credit periods
The purchase of fixed assets using cash flow

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26
Q

What are the 5 external influences on financial objectives and decisions? (6.1 setting financial objectives)

A

Competitor actions
Market forces
Economic factors
Political factors
Technology

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27
Q

What are the 3 internal influences on financial objectives and decisions? (6.1 setting financial objectives)

A

Corporate objectives
Resources available
Operational factors

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28
Q

What is a budget?

A

a financial plan

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29
Q

What two things does a budget provide? (6.2 Analysing financial performance)

A

A target for entrepreneurs and managers
A basis for a later assessment of the performance of a business

30
Q

What is the process of constructing a budget? (6.2 Analysing financial performance)

A

Market research Use income budgets as a guide
^ &raquo_space;»»»
step 1 = prepare step 2 = construct step 3 = forecast profit
income expenditure (or loss) by comparison
budgets budgets of income and expenditure
^ ^
trading records Potential suppliers may
(established busines) offer information on costs

31
Q

Businesses set budgets because of what 3 reasons? (6.2 Analysing financial performance)

A

They are an essential element of a b usiness plan
Budgets can help businesses decide wheather or not to go ahead with a business idea
Budgets can help with pricing decisions

32
Q

The difficulties of setting budgets include what 3 things? (6.2 Analysing financial performance)

A

Lack of data upon which to base a budget
Forecasting costs can be problematic
Competitors actions may negate data used for budgeting

33
Q

What are the 6 benefits of using budgets? (6.2 Analysing financial performance)

A

Targets can be set for each part of a business
Inefficiency and waste can be identified
May focus decision making on the achievement of objectives
Should improve financial control by preventing overspending
May help improve internal communication
May be motivating for user while enabling managers to monitor and control

34
Q

What are the 2 drawbacks of using budgets? (6.2 Analysing financial performance)

A

Operation can become inflexable
Dependent on accuracy of data

35
Q

What is variance analysis? (6.2 Analysing financial performance)

A

The study by managers of the differences between planned activities in the form of budgets and the actual results achieved

36
Q

Varience analysis allows managers to do what? (6.2 Analysing financial performance)

A

Examine the differences between planned activities in the form of budgets and the actual results achieved.

37
Q

Variance analysis allows managers to examine the differences between planned activities in the form of budgets and thr actual results achieved. The result may be what (two things)? (6.2 Analysing financial performance)

A

A positive (or favourable) variance when costs are lower than forecast or profit or revenue higher.
A nagative (or adverse) variance when costs are higher than expected or revenues are less than anticipated.

38
Q

Variances can be used to inform decision making. What are 3 things positive variances might lead to? (6.2 Analysing financial performance)

A

Increased production if prices are rising.
Reduced prices if costs are below expectations and that aim is sales growth.
Reinvestment in the business or higher divided payments.

39
Q

Cash flow forcasts comprise what three sections? (6.2 Analysing financial performance)

A

Receipts
Payments
Running balance

40
Q

What are payables? (6.2 Analysing financial performance)

A

Money owed for goods and services that have been purchased on credit (sometimes called trade creditors)

41
Q

What are receivables? (6.2 Analysing financial performance)

A

Money owed by a business’s customers for goods or services purchased on credit (soemtimes called trade debtors).

42
Q

The analysis of the relationship between payables (money leaving) and the recievables (money coming in) is important as it will enable a business to do what 5 things? (6.2 Analysing financial performance)

A

Forecast when cash outflows might exceed cash inflows.
Plan when and how to finance major items of expenditure.
Highlights any periods when cash surpluses may exist.
Asseses wheather an idea will generate enough cash to be able to survive.
Use the analysis as evidence when when requesting a loan.

43
Q

A break-even chart is a graph used in what… to do what? (6.2 Analysing financial performance)

A

Used in break-even analysis to illustrate the point at which total costs are equalto total revenue

44
Q

How is a breakeven chart constructed (10 steps)? (6.2 Analysing financial performances)

A

Give the chat a title
Label the axes (horizontal -output in units vertical -costs/revenues in pounds)
Draw on the fixed cost line
Draw on the variable cost line
Draw on the total cost line
Draw on the sales revenue line
Label the break-even point where sales revenue = total cost
Mark on forecast level of the company’s output
Mark on the margin of safety
Mark clearly the amount of profit and loss

45
Q

What is contribution? (6.2 Analysing financial performance)

A

The amount of money left over after variable costs have been subtracted from revenue.

46
Q

How to work out contribution? (6.2 Analysing financial performance)

A

Sales revenue - variable costs
or
Unit contribution x output

47
Q

How to work out unit contribution? (6.2 Analysing financial performance)

A

sales price per unit - variable cost per unit

48
Q

How to work out break-even? (6.2 Analysing financial performance)

A

contribution per unit

49
Q

How to work out profit? (6.2 Analysing financial performance)

A

contribution total - fixed costs

50
Q

Effects of changes in key variables on the break even chart are? (6.2 Analysing financial performance)

A

Change in key variable - Impact on break-even chart- Effect on break-even output-
Increase in selling price Revenue line pivots upwards Lower break-even output
Fall in selling price Revenue line pivots downwards higher break-even output
Ride in fixed costs Parallel upward shift in fixed and total cost lines Higher level of output required to break even
Fall in fixed costs Parallel downward shift in fixed and total cost lines Lower level of output required to break even
Rise in variable costs Total cost line pivotes upwards Higher level of output needed tp break even
Fall in variable costs Total cost line pivots downwards Lower level of output needed to break even

51
Q

What are the 5 benefits of break-even analysis? (6.2 Analysing financial performance)

A

Quick and easy to perform
Useful for new business start-ups
To support loan applications
To measure profits and losses
To model ‘what if?’ scenarios

52
Q

What are the 4 drawbacks of break-even analysis? (6.2 Analysing financial performance)

A

No costs are truly fixed
The analysis is only as good as the information provided
Sales revenue assumes all output is sold and at a uniform price
The total cost ignored any bulk-buying discounts

53
Q

What is the use of data for financial decision making and planning? (6.2 Analysing financial performance)

A

Data available: Poviding opportunity for:
budgets A scientific approach
cashflow to reducing risk in decision
break-even making.
ratio analysis

54
Q

What are 5 external (long-term) sources of finance? (6.3 Making financial decisions: sources of finance)

A

Equity
Loans
Venture capital
Mortgages
Crowdfunding

55
Q

What are the 2 internal (long term) sources of finance? (6.3 Making financial decisions: sources of finance)

A

Retained profit
Sale of assets

56
Q

what are the three external (short-term) sources of finance? (6.3 Making financial decisions: sources of finance)

A

overdraft
debt factoring
trade credit

57
Q

What are the advantages and disadvantages of retained profit? (6.3 Making financial decisions: sources of finance)

A

Advantages:
No interest to pay
Does not have to be paid back
No dilution os shares
Disadvantages:
shareholders may have reduced dividends

58
Q

What are the advantages and disadvantages of sale of assets? (6.3 Making financial decisions: sources of finance)

A

Advantages:
no interest to pay
does not have to be paid back
no dilution of shares
Disadvantages:
once sold, gone forever

59
Q

What are the advantages and disadvantages of equity? (6.3 Making financial decisions: sources of finance)

A

Advantages:
no interest to pay
does not have to be paid back
Disadvantages:
dilution might upset existing shareholders

60
Q

What are the advantages and disadvantages of loans? (6.3 Making financial decisions: sources of finance)

A

Advantages:
no dilution of shares
Disadvantages:
interest payments
set maturity dates

61
Q

What are the advantages and disadvantages of overdraft? (6.3 Making financial decisions: sources of finance)

A

Advantages:
quick and easy to set up and very flexable
interest payed only on amount overdrawn
Disadvantages:
interestpayments higher than for a loan

62
Q

What are the advantages and disadvantages of debt factoring? (6.3 Making financial decisions: sources of finance)

A

Advantages:
immediate cash
improves cash flow
protection from bad debts
reduced administration costs
Disadvantages:
expensive
customer relations may be effected

63
Q

What are the advantages and disadvantages of trade credit? (6.3 Making financial decisions: sources of finance)

A

Advantages:
eases cash flow
buy now, pay later
Disadvantages
if late paying can damage credit history

64
Q

What are four causes of poor cash flow problems? (6.4 making financial decisions: improving cash flow and profits)

A

Poor management
Giving too muvh trade credit
Overtrading
Unexpected expenditure

65
Q

What are the three methods of improving cash flow? (6.4 making financial decisions: improving cash flow and profits)

A

Debt factoring
Sale and leaseback
Improved working capital control

66
Q

What is working capital? (6.4 making financial decisions: improving cash flow and profits)

A

A measure of an organisation’s short-erm financial health, the cash available to a business for its day-to-day operations, calculated by current assets minus current liabilities.

67
Q

What is profitability? (6.4 making financial decisions: improving cash flow and profits)

A

Measures profits against some yardstick, such as the sales revenue achieved by the business

68
Q

How can control of working capitol can help cash flow management? (6.4 making financial decisions: improving cash flow and profits)

A

Selling stocks of finished goods quickly
Making customers pay on time and offering less trade credit
Slowing cash outflows
Stimulating sales
Selling off excess material stocks

69
Q

How can profitability be improved? (6.4 making financial decisions: improving cash flow and profits)

A

Increase prices
Cut costs
use capacity as fully as possible
Increase efficiency

70
Q

What are 3 difficulties improving cash flow? (6.4 making financial decisions: improving cash flow and profits)

A

Factoring: profit margin reduced and it may highlight cash flow difficulties
Sale and leaseback: asset is removed forever and rent must now be paid
Working capital control: customers put off by reduced credit periods and suppliers unwilling to extend credit periods

71
Q

What are 4 difficulties improving profit? (6.4 making financial decisions: improving cash flow and profits)

A

Increasing prices: reduced sales and revenue
Cutting costs: possible reduction in quality
Full capacity usage: problems in matching supply with demand
Increasing efficiency: possible redundancies if technology is introduced

business (7 decks)

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