Chapter 6 Flashcards
What is the primary purpose of finance in business?
Finance manages the flow of money in a business to ensure profitability, sustainability, and growth.
What are the two main categories of financial management?
- Revenue Management: Generating and increasing income.
- Cost Management: Minimizing expenses without compromising quality.
What is cash flow?
Cash flow is the movement of money into and out of a business, representing its liquidity.
What are common sources of business revenue?
- Sales of products or services
- Subscriptions or recurring payments
- Licensing or royalties
- Investments or interest.
How can businesses increase revenue?
- Expanding the customer base
- Increasing the average transaction value
- Introducing new products or services
- Upselling and cross-selling.
What is the importance of pricing strategy in revenue management?
A well-designed pricing strategy ensures competitive pricing while maximizing profitability and perceived value.
What are fixed costs?
Fixed costs are expenses that remain constant regardless of business activity, such as rent or salaries.
What are variable costs?
Variable costs fluctuate based on business activity, such as raw materials or shipping fees.
How can businesses reduce costs effectively?
- Streamlining operations
- Negotiating better supplier contracts
- Reducing waste
- Automating repetitive tasks.
What is the formula for calculating profit?
Profit = Revenue - Costs
What are gross profit and net profit?
- Gross Profit: Revenue minus the cost of goods sold (COGS).
- Net Profit: Gross profit minus all other expenses, including taxes and operational costs.
Why is profitability critical for business success?
Profitability ensures a business can sustain operations, invest in growth, and provide returns to stakeholders.
What is the break-even point?
The break-even point is the level of sales at which total revenue equals total costs, resulting in no profit or loss.
What is ROI (Return on Investment)?
ROI measures the profitability of an investment and is calculated as: ROI = (Net Profit / Investment Cost) x 100
What is the difference between cash flow and profit?
Profit measures overall earnings, while cash flow tracks the actual movement of money in and out of the business.
Why is budgeting important for a business?
Budgeting helps allocate resources efficiently, control expenses, and plan for future growth.
What are the key components of a business budget?
- Revenue projections
- Fixed and variable costs
- Emergency reserves
- Planned investments.
How can businesses create a financial plan?
- Set financial goals.
- Forecast revenues and expenses.
- Monitor performance using financial metrics.
- Adjust the plan based on actual results.
What are common financial risks businesses face?
- Cash flow shortages
- Market fluctuations
- Rising operational costs
- Bad debts or unpaid invoices.
How can businesses mitigate financial risks?
- Maintain cash reserves
- Diversify revenue streams
- Regularly review financial performance
- Use insurance and legal protections.
Activity: Analyze Cash Flow
Review your cash flow statement to identify trends, such as periods of surplus or deficit.
Activity: Calculate Break-Even Point
Use historical data to determine the sales volume needed to cover all costs.
Activity: Create a Financial Dashboard
Design a dashboard that tracks metrics like revenue, expenses, cash flow, and profitability.
