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Finacial Management Flashcards

1
Q

Reasons why business may fail?

A
  • Lack of capital
  • Too many long term assets
  • Inadequate control over inventory (stock) + credit
  • Problems with cash flow
  • Lack of control over costs and sales
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2
Q

The difference between total sales and total costs of the business?

A

Net Profit

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3
Q

The cost of borrowing money, or the return of saving?

A

Interest

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4
Q

Profits earned by a business that are reinvested in the business rather than paid out as dividends?

A

Retained profit

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5
Q

The money required to set up to run and expand a business?

A

Finance

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6
Q

Measures of a business’s ability to pay its debts.

A

Liquidity

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7
Q

Where a business sells an assets and then leases it back?

A

Sale and Leaseback

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8
Q

Where the shares of a company are offered for sale on a stock market for the first time?

A

Floatation

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9
Q

Resources owned and used by a business over the long term such as buildings and machinery?

A

Fixed assets

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10
Q

A loan facility from the bank that may have to be repaid at any time?

A

Overdraft

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11
Q

Another term for the value of sales made by a business?

A

Revenue

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12
Q

Everything that the business owns that has monetary value, including cash, stocks, debtors?

A

Assets

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13
Q

Measurement of net profit - liabilities?

A

Gross Profit

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14
Q

An alternative word for revenue or sales?

A

Turnover

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15
Q

What is a debenture?

A

Long term borrowing, similar to selling shares, promise of repaying amount lent w/ fixed period in time + set amount interest.

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16
Q

Pros of debenture?

Cons of debentures?

A

PROS
Very structured method, exact interest paid consistently

CONS
Debenture holder claim item in trade for unpaid debts over time.

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17
Q

A bank loan is money borrowed from the bank (to be repaid), with interest applied over a set period of time. What are the PROS and CONS of this?

A

PROS
easy, large amounts, structured

CONS
business risk poor credit rating + bankruptcy

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18
Q

What is a issuing shares? And why do businesses use this method?

A

Issues shares is when a business sells a fraction of their business to an individual or another business.

Reasons for this is to raise capital. Depending on percentage obtained determines amount received.

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19
Q

PROS and CONS issuing shares?

For both the owners of the share/s and the business selling them.

A 
owners of shares
PROS
- don’t need to repay money invested
- cheaper than a loan
- large amounts can be made

CONS
- lose investment if business fails

sharing businesses
PROS
- short term method to improve cashflow (sale of share)

CONS

  • pay shareholders profits
  • share of ownership -> loss of control of business
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20
Q

Define venture capitalist?

A

Individual group invest in small, risky business

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21
Q

Pros and cons of having a venture capitalist?

A

PROS
- raise money for business even if bank disagrees with idea

CONS
- VC at risk and may want control (percentage) of/over business

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22
Q

PROS and CONS selling assets?

A

PROS
- business using money already invested in business

CONS

  • may sell something not worth selling
  • could sell something business needs in future
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23
Q

Define Mortgage?

PROS and CONS?

A

Long term loan provided by bank to by property.

PROS
- structured repayments long term (25+ years)

CONS

  • large sums interest
  • take long time to repay
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24
Q

Government grants?
+
PROS and CONS?

A

Money given to a business by government. Usually used to help finance new jobs - especially those that create new jobs.

PROS
- don’t need to repay money

CONS

  • limited funds available
  • may be restrictions on what money can be used for
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25
Q

Hire purchase?

A

Item bought on finance, repayments made each month. Final payment when items becomes property of business

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26
Q

PROS and CONS hire purchase?

A

PROS
- flexible method
(can hand back if item no longer required, payment stop)

CONS

  • high interest
  • item not owned until end of term
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27
Q

Define trade credit?
+
PROS and CONS

A

“But now, pay later” basis for items bought from suppliers

PROS
- more money in immediate future

CONS
- accounts settled within 30, 60, 90 days

28
Q

Retained Profit? PROS and CONS?

A

Money kept from business by owners (marked retain profit on balance sheet)

PRO
- pay no interest on money

CONS

  • could been invested business
  • business may not have enough profit to retain bye to business needs
  • aggravate shareholders if dividends is affected (share percentage)
29
Q

Debt factoring?

PROS + CONS?

A

The company sells outstanding debt to a debt factoring company, who return a smaller percentage of that debt to the business

PROS
business gets money that may never have been paid back
Saves business time chasing customers

CONS
time consuming
Receive less money than owed

30
Q

Leading?

PROS + CONS?

A

Business rents item from owner. Used to help obtain new equipment

PROS
Cost of assets spread over its life
Massive money analysts not needed to purchase

CONS
may result in being more expensive to buying it over long period time
Business doesn’t own asset so doesn’t appear balance sheet

31
Q

Short term financing?

A

Up to 3 years with high interest

32
Q

Medium term financing?

A

3 to 10 years with medium interest

33
Q

Long term financing?

A

Over 10 years with low interest

34
Q

Short term financing is used for?

A

Day to day running of a business and is usually for a period of up to 3 years.

35
Q

Examples of inflows?

A
  • sales revenue
  • capital
  • loans
  • grants
36
Q

Examples of outflows?

A
  • purchases
  • rent
  • wages
37
Q

Examples short term financing?

A
  • overdraft
  • short term loan
  • hire purchase (external)
38
Q

Examples medium term financing?

A
  • medium term loans ($10,000 +)
  • hire purchase
  • leasing
39
Q

Factors that influence a banks decision to lend?

A
  • assets
  • credit history
  • current inflow
  • proposal of product
  • nature of market

MORE SECURITY = LESS INTEREST

40
Q

Sale + leaseback?

A

Company sells assets (land, etc.) for cashflow • company then leasing asset back from leasing company as business still using item

As leasing is an expanse business can claim as tax recieiving additional money

41
Q

Debt ratio?

A

Indicates how much of a business’s finances are due to borrowing; whether assets are funded by liabilities

42
Q

High debt ratio (50% +)?

A

Funded by borrowings

43
Q

Low debt ratio (< 50%)?

A

Funded by owner

44
Q

Recommendations to fix debt ratio?

A
  • decrease debt through repayment
  • monitor debt + equity ratios as impacts future borrowings
  • minimise need to hold large assets
45
Q

Equity ratio?

A

Indicates extent to which owner has financed business as opposed to using an alternative source of finance (borrowings)

46
Q

High equity ratio?

A

Funds provided by owner

47
Q

Low equity ratio?

A

Funds provided by borrowings

48
Q

Cash flow to revenue ratio?

A

Indicates the entity’s efficiency in converting revenue from sales and additional income, to cash.

49
Q

High cash flow to revenue ratio?

A

Large proportions of revenue realised as cash (company not efficient cash flow)

50
Q

Low cash flow to revenue ratio?

A

Small amounts of revenue consistently noticed as cash and converted.

51
Q

Cash flow to revenue recommendations?

A
  • increase cash from operatating activities
  • increase cash sales compared to credit sales
  • improve credit policy
  • offer early repayment discounts
  • discounts on cash payments
  • easy payment options, electronic (PayPal, BPay, etc)
52
Q

Net profit ratio?

A

Indicates the ability of the enterprise to generate a return in the owner’s investment

53
Q

High net profit ratio?

A

Operating revenue high + operating expenses low

54
Q

Low net profit ratio?

A

Selling volume and sales low compared to fixed costs

55
Q

Recommendations net profit ratio?

A
  • increase sales revenue

- reduce expenses

56
Q

Capital definition?

A

All of the assets invented into company included the one with debt on them

57
Q

Revenue = ?

A

Income, money made

58
Q

Define cash sales?

A

Immediate payment (paid w/ cash)

59
Q

Entity?

A

The business

60
Q

What is equity?

A

Difference between value of assets/ value of liabilities

61
Q

Enterprise?

A

The business.

62
Q

Define surplus?

A

Excess amount of money left over after requirements have been met

63
Q

Stock level control??

A

At the end of the financial year, products go on sale in order to reduce interest charged on businesses inventory

64
Q

Inventory??

A

Produces purchased to sell as good from company

65
Q

Improving cash flow?

A
  • Ensure surplus
  • access working capital
  • meet short term expenses
  • distributing payments consistently by subverting/ trade credit
  • increase sales revenue by marketing + stock level control
  • strong credit policy
  • use of debt factoring
66
Q

Improve working capital?

A
  • ensure supply cash adequate meet short term expenses
  • strong credit policy
  • an overdraft
  • sale + leave back
  • scheduling accounts payable chronologically
  • control stock level in inventory

Business (5 decks)

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