Chapter 10 - Financial analysis Flashcards
What are the affects of technology on finance functions?
- Big data - analyse large amounts
- Cloud computing - reduce costs
- Predictive analytics - assess future trends
- Fintech - blockchain, secure payment
Define ‘business partner’ in context of the finance function
Finance professionals being fully embedded in the operations of the business
Define shared or global business services
An in house function which provides finance support to all functions within the business
Define leading and lagging
Raising cash by delaying payments to suppliers (lagging) and accelerating receipts from customers (leading)
How can sources of finance be evaluated?
SAF
- Suitability - appropriate for use? e.g. long term asset long term finance
- Accessibility - acceptable to shareholders? Risk attitude
- Feasibility - can additional finance be raised
What are the advantages of using retained profits as a source of finance?
- Simple
- No change in ownership
What are the disadvantages of using retained profits as a source of finance?
- Restrict dividend payouts
- May not be sufficient for growth
What are the advantages of issuing shares as a source of finance?
Long-term capital
What are the disadvantages of issuing shares as a source of finance?
Dilute existing control
What are the advantages of using a bank loan as a source of finance?
- Repayments are known so can be budgeted
- Flexible
- Quick
- No dilution of control
What are the disadvantages of using a bank loan as a source of finance?
- Increased gearing and risk
- Interest to be paid
- Covenants
What are the advantages of using an overdraft as a source of finance?
- Flexible
- Only pay interest on amount owing
- Doesn’t count towards gearing
What are the disadvantages of using an overdraft as a source of finance?
- Repayable on demand so less reliable
- More expensive
What are the advantages of using an initial coin offering as a source of finance?
- Simple
- No change in ownership
- Enable start up to attract international investors
What are the disadvantages of using an initial coin offering as a source of finance?
- Failure to raise amount required results in funds returned to investors
- Unregulated and associated with fraud
Define initial coin offering
The creation of virtual ‘tokens’ which are sold to raise funds for business projects
Define risk
Situations which may occur whose probability of occurrence can be calculated based on past experiences
Define uncertainty
Situations whose outcome cannot be predicted with statistical confidence
What are the disadvantages of EV?
- Probabilities are estimates
- Long-term averages - not useful for one off decisions
- EV outcome may not be actual outcome
- Do not consider attitudes of risk
Define strategic cost management
Focusing on what is driving costs and whether they can be reduced
What are the qualitative techniques for forecasting?
- Delphi technique
- Sales force opinions
- Executive opinions
- Market research
Define the Delphi technique
Selecting a panel of experts who produce an independent forecast. The forecast is shared, and then each produces a revised forecast. Process continues until they are in agreement with one definitive forecast
What are the quantitative techniques for forecasting?
- Linear regression
- Time series analysis
What does linear regression do?
- Measures the relationship between two variables
- Strength is measured by correlation coefficient
- Coefficient of determination (r squared) explains proportion of variation in one variable explained by variation in other
What does time series analysis do?
Separates seasonal and cyclical fluctuations from long-term underlying trends
Define budgeting
A business plan for the short term
What are the advantages of budgeting?
- Promotes forward thinking - identifies problem early
- Motivates performance
- Yardstick for measuring performance
- System of authorisation - managers spend up to limit
What are the disadvantages of budgeting?
- May be demotivated if budget unattainable
- Slack may be built in to make it attainable
- Short-term results rather than underlying causes
Define standard costing
Predetermined estimates of costs, the collection of actual costs and the comparison of the two to identify variances
What are the disadvantages of standard costing?
- Standards become out of date
- Variances for which manager is held accountable can be out of their control
- Once standard met, no incentive to improve
