Component 1 - Finnance Flashcards
Explain : Financial planning as a function of the finance department
Financial Planning and Budgeting:
Financial planning includes forecasting future revenue and expenses in order to make sure that the organisation has enough resources to meet its financial obligations.
Read - Financial analysis as a function of the finance department
Financial Analysis: The finance department is responsible for analysing the financial performance of the organization. This includes analysing financial statements, identifying trends, and identifying areas where the organization can improve its performance.
Read - Financial control
financial control is to ensure financial resources are used effectively and efficiently. This includes implementing procedures to prevent fraud and errors, and monitoring compliance with financial regulations.
Explain : What is meant by a budget
Budget - A financial plan that outlines an organization’s expected income and expenses for a specific period of time.
Read - Sources of finance ;
Equity financing
Debt financing
Retained earnings
Sources of finance refers to the various ways in which an organization can raise money to fund its operations and growth. Such as
1) Equity financing - This involves raising money by selling ownership stakes in the company, usually in the form of shares of stock. This can be done through an initial public offering (IPO) or through private placement to individual investors or institutional investors.
2) Debt financing - This involves borrowing money from external sources, such as banks, financial institutions, or bondholders. This can be done through short-term loans, such as lines of credit, or through long-term loans, such as bonds.
3) Retained Earnings - Retained earnings are the portion of the company’s profits that is kept by the company rather than being distributed as dividends to shareholders. These retained earnings can be used to finance the company’s growth and operations.
Read - Internal sources of finance -
- Owner’s capital
- Retained profit
- Sale of assets
Owner’s capital: This refers to the money invested by the owner or shareholders of the organization. This can include personal savings, equity from the sale of assets, or proceeds from the sale of shares of stock.
Retained profit: This refers to the portion of the organization’s profits that is kept by the company rather than being distributed as dividends to shareholders. Retained profits can be used to finance the company’s growth and operations.
Sale of assets: This refers to the sale of non-current assets, such as land, buildings, equipment, or investments, to generate cash. This can be done to raise funds for specific projects, to pay off debts, or to invest in new opportunities.
Read - External sources of finance -
Overdrafts,
Loans,
share capital,
venture capital
leasing,
trade credit
Debt factoring
1 )Overdrafts: This is a short-term loan that allows an organization to borrow money up to a certain limit, as long as it has an account with a bank. The organization can use the funds as needed, and is charged interest only on the amount borrowed.
2 ) Loans: This is a long-term loan that is provided by banks, financial institutions, or other lenders. Loans can be secured or unsecured, and the organization must pay back the borrowed amount, along with interest, over a specified period of time.
3 ) Share capital: This is the money raised by selling shares of stock to investors. Shareholders become part-owners of the company and have a claim on its profits, but also share its risks.
Explain : Cashflow
Cash flow refers to the inflow and outflow of cash in an organisation.
It is a measure of the amount of cash that is available to an organisation at a given time.
Explain : What is a Cashflow forecast
A cash flow forecast is a projection of a company’s expected cash inflows and outflows over a specific period of time, typically a year
Explain : Three sources of cashflow
Operating activities - These include the cash generated by a business through its day-to-day operations, such as the sale of goods or services.
Investing activities - These include the cash generated through the purchase or sale of long-term assets such as property, equipment, or investments in other companies.
Financing activities - These include the cash generated through the issuance of debt or equity, such as issuing bonds or selling shares in the company.
Explain : Three strategies to improve cashflow
Increase sales - One of the most straightforward ways to improve cash flow is to increase the amount of cash coming into the business by increasing sales.
Reduce costs - By cutting costs, a business can free up cash that can be used to pay bills or invest in growth.
Improve credit management - By closely monitoring and managing accounts receivable, a business can improve its ability to collect payment from customers and reduce the amount of time between making a sale and receiving payment.
Explain : benefits and limitations of cashflow forecasts
Benefits
1- Identification of potential cash flow problems, By forecasting cash flows, a business can identify potential shortfalls in cash before they occur, which can help the business to take corrective action.
2 - Monitoring performance, By comparing actual cash flows to the forecast, a business can monitor its performance and identify areas where it needs to improve.
Limitations
1 - They are subject to errors - If the data or information used in the forecast is not accurate or complete, the forecast may be inaccurate, which can lead to poor decision-making.
2 - They are based on assumptions: Cash flow forecasts are based on assumptions about future sales, costs, and other factors, which may not turn out to be accurate.
Evaluate : The uses of Budgets
Write on word
Evaluate : Advantages and disadvantages of different sources of finance and their impact longterm
Write on word
Evaluate : The impact of a cashflow forecast
Write on word
